Anglo-Australian mining giant Rio Tinto (LSE: RIO) is facing a slew of challenges, but Brexit certainly isn’t the most pressing. That title belongs to the extended commodities slump triggered by a slowdown in Chinese demand for everything from aluminium to zinc. And while Rio’s copper division would be hit if post-Brexit malaise spread across the Channel to Europe, the company’s fortunes are much more tied to economic growth in India or in China, which consumes 40% of global copper production.
While commodities prices are unlikely to reach the record highs set four or five years ago as China’s economy moves away from infrastructure-led growth, Rio Tinto is among the best placed miners to survive this new normal. That’s because although Rio made the same hubristic mistake as competitors and piled on debt to fund new mines in the boom times, the company’s balance sheet and assets are in better shape than most.
Year-end net debt of $13.8bn represented a gearing ratio of 24%, healthier than most competitors’, and a number that should be improving in the years to come as commodities prices rebound and asset sales progress. Likewise, the company’s low-cost-of-production assets lead analysts to forecast a return to profitability this year, driven by an iron ore division that produced $3.9bn in underlying earnings last year. The commodities sector remains a highly cyclical and risky one, but Rio Tinto is one of the better companies in the industry and should be largely immune from post-Brexit panic.
Minimal UK exposure
The UK accounts for less than 2% of global demand for oil, so leading Middle Eastern oil services provider Petrofac (LSE: PFC) will face few immediate ramifications from the Brexit vote. Petrofac’s customer base of national oil companies also provides significant protection against market turbulence since customers such as Saudi Arabia and Kuwait are continuing to pump oil at record volumes to compensate for lower prices.
Petrofac’s order book of $18.9bn worth of projects will provide impressive revenue streams for several years to come. This will be necessary to tackle net debt of $1.1bn, a worryingly high 3.5 times last year’s EBITDA. However, if the company returns to profitability this year as management expects and can begin to maintain dividend payments with retained earnings, Petrofac could be an interesting play in the oil & gas industry.
Georgia on my mind
One firm with even fewer ties to the UK is BGEO Group (LSE: BGEO), the holding company for Bank of Georgia and other firms focused on the former Soviet republic. The group has benefitted from the country’s sustained economic growth and in Q1 reported a 39.6% jump in year-on-year profits.
The most important division remains Bank of Georgia, which has been expanding at an impressive clip and is the largest retail bank in country. The bank is in rude health, especially compared to its UK counterparts, and in Q1 reported a 3.7% year-on-year revenue increase alongside return on average equity of 21.2% and a low cost-to-income ratio of 37.9%.
Investors who aren’t put off by the conglomerate nature of the business, which has stakes in healthcare, real estate and utilities among others, could do much worse than BGEO. The Georgian economy as a whole continues to grow by 3%-plus annually, BGEO shares trade at a very cheap 8 times forward earnings with a 3.8% yield and the country should remain shielded from any Brexit-related panic.
