We have conducted a review of Rio Tinto’s return on assets and find there are five assets likely to be considered non-core, which together account for US$13 billion of our NPV and US$7 billion of book value. We maintain our Accumulate recommendation on Rio Tinto based on its attractive valuation, strong balance sheet and improving shareholder returns profile, with a $74.00 target price.
- Queensland Coal – The auction process for Rio Tinto’s Queensland coal assets is ongoing. We regard these as good assets with high returns; however, Rio Tinto’s exit from coal likely reflects pressure from some investors related to environmental, social and governance considerations.
- Iron Ore Company of Canada (IOC) – Given strong pellet premiums, it is a good time to dispose of IOC, in our view. The assets are unlikely to compete for capital against the Pilbara, despite good returns recently. IOC’s book value is about US$0.9 billion versus our NPV at US$0.5 billion.
- Pacific Aluminium – This could be an opportune time for Rio Tinto to dispose of its Australian aluminium smelters given the current strength in aluminium markets. The assets are carried on the books for just over US$1 billion, while our NPV is closer to US$3 billion.
- Iron and Titanium – These assets are struggling to generate a decent return, and a large investment in South Africa would be required to extend the life of mine at Richards Bay. We view Rio Tinto as a willing seller, but only at full value. We value the assets at US$5.4 billion versus their book value of US$3.8 billion.
- Uranium – The Rossing and Ranger assets are likely to be non-core, although poor returns and the short mine life at Ranger suggest a sale would be difficult to execute due to a lack of potential buyers. The book value is negative, as is our NPV for the combined asset base, which is positive for Rossing but negative for Ranger given the cost of rehabilitation.
Given the timing of the commodity cycle, with high aluminium, coal and iron ore pellet prices, Rio Tinto would have the opportunity to transact on these asset disposals if it chose to. Further asset sales in the medium term may help improve the company’s returns profile and provide further excess cash to be distributed.