Rio’s free cash flow fixation underlines broader mining challenge

Added 3rd August 2016

“Boring is the new exciting” is how Rio Tinto CFO Chris Lynch characterised the diversified miner’s continued focus on improving productivity and better leveraging its existing asset base.

Rio’s free cash flow fixation underlines broader mining challenge

This focus and new CEO, J-S Jacques commitment to continue generating free cash flow and returning money to shareholders, a focus started by his predecessor, Sam Walsh, underscores a significant shift in the mind-set of diversified miners more broadly and an ongoing bifurcation within the ‘big four’.

The focus on shareholder returns and cash flows is a recent phenomenon, one that comes on the back of strong lobbying by the fund management community and follows the mad pursuit for size at any cost that characterised the end of the super cycle.

For James Sutton, client portfolio manager on the JPM Natural Resources Fund, the shift is an understandable acknowledgement of the concern many investors have that commodities like iron ore are ex-growth – a situation that does not tend to lend itself to massive capex outlays.

As Jacques pointed out during the Q&A following the release of the results, “World class assets remain resilient even when prices dig deep into the cost curve.”

But, while the focus on cash returns has begun to filter down through the sector, Sutton says, from JP Morgan’s point of view, Rio’s strategy in this regard remains one of the most clearly articulated. It is for this reason that the firm prefers the stock to what JP Morgan sees as Rio’s clearest rival BHP Billiton.

What is clear, however, is that while both BHP and Rio have performed well year to date, their share prices are up 24.2% and 25.7% respectively, they significantly lag the performance of the other two major diversified Anglo American and Glencore, which are up 175% and 108% respectively.

Granted, both of the latter had fallen further, but there remains a marked discrepancy.

“We see them as two very different beasts,” Sutton told Portfolio Adviser, “Anglo American provides investors with more leverage to the sector, while Rio provides a consistent steady return.”

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About Author

Geoff Candy

Group digital editor

Geoff Candy joined Portfolio Adviser as News Editor in May 2014. He has been a financial journalist and broadcaster since 2005 and, in that time has worked in both South Africa and the Netherlands, covering everything from high street retailers and construction companies to mining and insurance.



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