The mining industry makes up one of the largest sectors in the ASX and Rio Tinto (RIO) as one of Australia and globally largest listed diversified miner is one of the largest contributor to the sector market size.
Historically we preferred Rio over BHP (or S32) due to its higher concentrated exposure the main commodity we like including iron ore, aluminum and to an extent coal. Aside from BHP there is no one else with a diversified commodity portfolio across tier 1 assets like Rio’s and a heavy iron ore exposure.
BHP on the otherhand had significant potash and energy exposure, whilst this has been dialed back since the end of the shale boom where BHP lost billions. We don’t like mining companies with energy businesses due to the difference in the cashflow and investment profiles. Mining is capital heavy upfront and low maintenance expenditure once the operation has started while conventional energy is the opposite with low capital upfront but consistent requirement for ongoing capital investment. We also like to take energy exposure through energy companies directly so as to control the sub sector exposure.
Recently Rio Tinto has underperformed BHP given the controversy surrounding the aboriginal caves and hopefully it has now turned the corner.
At the end of the day the main driver for the business has always been China’s demand for iron ore. It is unquestionable China is unhappy with Australia and it is express its unhappiness via trade channels. However iron ore like LNG is not one of those commodities where it can be easily replaced. Therefore the risk of any action from China in this space is low.
The main risk to our investment thesis ever since we originally bought into the position is a Chinese property market bust which negatively affects the wider Chinese economy. This would materially impact demand for iron ore from China and will have wider regional and global economic implications. No matter how good are the underlying asset portfolio. At the end of the day these are cyclical stocks with its performance linked closely to the global economic cycle.
Rio Tinto ASX/LSE Arbitrage
Rio is a dual listed stock on the ASX and the LSE (similar to BHP). The shares listed on both exchanges have the same voting rights, dividends and claims over the cashflow of the company. Albeit these are separate companies but controlled by the same board.
It has always been one of its quirks that the Rio Tinto shares on the LSE trades at a discount to the Rio shares listed on the ASX. This couldn’t be attributed to the difference in franking credits as the dividend from both shares have the same franking credits.
The table below shows the value difference between the ASX Rio shares vs the LSE Rio shares converted into Australian dollar today. This shows there is still a material discount of the LSE shares and what this means is that for long term investors that are looking to buy Rio it could work out better with better risk adjusted return if the shares are purchase in London.
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Whilst there is an inherent degree of FX risk on the principal, the performance of the ASX shares will anchor any depreciation or appreciation in the GBP over the long run. Rio also elects to pay dividends in USD so there is limited FX risk on the dividend.
Overall the main risk from taking this position is the spread widening further between now and the time entering into the investment and time of sale but given the degree of the buy in discount today any downside could be a further buying opportunity. Just remember don’t use margin for this as the use of leverage increase the risk of blow out at the worst possible moment.
Rio Tinto Dividends
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Rio Dividend Dates
Interim dividends are paid in September and final dividends paid in April.