At the start of 2013 new chief executive Sam Walsh breezed into the boardroom of FTSE 100 mining giant Rio Tinto (LSE: RIO) (NYSE: RIO.US) like a breath of fresh air.
He proclaimed: “Under my leadership, Rio Tinto will have an unrelenting focus on pursuing greater value for shareholders”.
Exceeding targets
Improving discipline in allocating capital for investment (and balancing this with returns to shareholders), and improving performance within the group’s existing businesses were Walsh’s big priorities. Targets for 2013 included a $750m reduction in exploration and evaluation spend, and operating cash cost savings of $2bn.
When Rio released its 2013 results in February this year, exploration and evaluation spend was ahead of target with a £1bn reduction, while operating cash cost savings also came in ahead of target at £2.3bn.
Rio’s cash flows for the year soared 22% to over $20bn — well ahead of market expectations. Furthermore, Walsh delivered on his promise to balance the use of capital between the business and returns to shareholders by cranking the dividend up 15% — again, ahead of analysts’ forecasts.
Rio’s shares climbed to over £36 in the days following the release of the results, but have since moved back down into a trading range of £30-£34. Walsh’s impressive first-year performance seems to have been soon forgotten, and the market appears to have re-focused again on macro concerns about such things as demand from China and iron ore prices.
Under-promise, over-deliver
Rio’s shares are trading at a bit below £33 at the time of writing. This puts the company on a modest current-year forecast P/E of 10.8, falling into bargain territory of below 10 for 2015. There’s a better-than-market-average dividend yield too: analyst forecasts have this rising from 3.7% this year to 4% next year.
Rio’s half-year results are scheduled for 7 August. If Walsh can beat market expectations, we could see a significant re-rating of the shares from their current modest valuation. Not simply because of beating expectations, but also because the chief executive would be starting to build a track record of under-promising and over-delivering.
Analysts from Credit Suisse have recently finished a tour of Rio’s North American operations, and were impressed with the “relentless” focus on cash generation and cost cutting. As a result, they see upside to current market expectations of free cash flow, and Walsh beating his cost-cutting target of $3bn for the year.
Signs of this coming through in next month’s interim results, and another healthy uplift in the dividend, could put a rocket under Rio’s shares: they could start pushing up towards £40.
