Read more on ethical and sustainable investing in Morningstar's Ethical Investing Week 2013.
We have decreased the share price at which we consider Rio Tinto (RIO) to be fairly valued estimate from £42.50 to £41.65, factoring in the stronger British pound. We only recently reduced our fair value estimate from £46.65 after revisiting capital and operating cost forecasts and consequently reassessing Rio's growth prospects. Iron ore, copper and aluminium remain the three largest segments for Rio, accounting for a little changed 95% of group fair value. However, the relative weightings have changed considerably. In Rio's case the majority stems from taking a hatchet to the aluminium segment for which we reduced fair value by more than half after cutting growth projections and increasing operating costs. Aluminium's contribution to fair value falls from 31% to 15%, a level more in line with copper's importance. Our copper fair value estimate is unchanged and its weighting increases marginally by virtue of the pie shrinking overall. Similarly, the iron ore segment fair value is unscathed, though weighting increases from an already high 56% to a dominant 70% share. Rio is by and large an iron ore story.
The 22% reduction in our Rio fair value chiefly reflected decline in the aluminium segment, the second-largest contributor to fair value overall. The contribution from most of the lesser segments, including energy coal, rises marginally with higher margins factored, but these are near immaterial to Rio's earnings. Copper and iron ore fair values are stable.
Rio Tinto is a top-tier global miner along with BHP Billiton (BLT), Brazil's Vale (VALE), and U.K.-based Anglo American. A world-class asset base and capable management make Rio Tinto one of the few miners to earn more than its cost of capital through the commodity cycle. Geographic and product diversification give the company relatively stable cash flows and lower operating risk than many of its mining peers. Most revenue comes from the relative safe havens of Australia, North America, and Europe, though operations span half a dozen continents.
Through selective acquisitions and grass-roots exploration, Rio Tinto has assembled a large portfolio of long-lived, low-cost assets. Operations include world-class hubs in aluminium, coal, copper, diamonds, gold, iron ore, industrial minerals, and uranium. This competitive resource base sets Rio Tinto apart from most of the rest of the pack and supports above-average returns for both the resource industry generally and its more select diversified mining peers.
This article is an extract taken from an analyst note. To read the full report Premium members can click here. Not a Premium member? Get instant access when you take a 14-day free trial.
