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Metals Mining Firm Still Offers 'Best Risk/Reward Among Its Peers'

A BMO Capital Markets report reviewed the changes to its model on the company.

In an August 3 research note, analyst Edward Sterck reported that BMO Capital Markets increased its forecasted shareholder return on Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE) to 9% from 8.4% to reflect the new US$1 billion share buyback program. “This places Rio Tinto well above the peer average of 6.8%,” he added.

Also, Sterck highlighted that this higher projected shareholder return comes despite an environment of inflationary cost pressure, resulting specifically in higher costs for Rio Tinto’s base metal segments.

In its model of Rio Tinto, BMO boosted its projected cost estimates within its copper and its bauxite, alumina and aluminium divisions. BMO decreased the expected prices for sales of alumina and bauxite, which led to a reduction in EBITDA as well. The miner’s 2018E group EBITDA was lowered by 7% and its 2019E EBITDA, by 4%.

Sterck concluded by saying the Rio Tinto story is “still attractive” and “despite slightly reduced EBITDA estimates, the company continues to offer the best risk/reward and commodity mix compared to its largest peers, in our opinion.”

BMO Capital has an Outperform rating and a £46 per share target price on Rio Tinto, whose current share price is around £38.81.


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Disclosures from BMO Capital Markets, Rio Tinto, August 3, 2018


Analyst’s Certification
We, David Gagliano and Edward Sterck, hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities or issuers. We also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.

Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Company Specific Disclosures
Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months from Rio Tinto.
Disclosure 6C: Rio Tinto is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: C) Non-Securities Related Services.

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