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Almost the first words in Rio Tinto’s 2020 annual report, published in February, were these from its chairman, Simon Thompson: “Our strong performance in many areas during 2020 was overshadowed by the destruction of two ancient rock shelters in the Juukan Gorge [in Australia].
“I reiterate our unreserved apology to the Puutu Kunti Kurrama and Pinikura people for the destruction. We are committed to learning the lessons from Juukan Gorge to ensure that the destruction of a site of such exceptional cultural significance never happens again.”
Rio has offered more than words: it has scrapped plans to mine at several culturally sensitive sites and replaced its previous chief executive, Jean-Sébastien Jacques, with Jakob Stausholm, whose “collaborative leadership style, strong values and personal commitment to the role of business in promoting sustainability made him the ideal choice to lead us”.
Rio’s board has engaged with groups that represent Australia’s indigenous people, including a visit to Juukan Gorge by Thompson in the company of indigenous elders. It has also appointed an indigenous community leader to consult with traditional owners of the lands on which it mines on the formation of an indigenous group to advise the board and senior managers.
It’s fair to say then that the FTSE 100 company’s response to the Juukan Gorge public relations disaster (which was far from its first) went beyond paying lip service to the need for change. In an era of unprecedented investor attention to environmental, social and governance issues, however, Rio could hardly have done less.
Miners need periodic access to capital, and the pool of investors inclined to hand it to them was fast dwindling anyway. Juukan Gorge will hardly have helped.
Let’s turn to the other aspect of the chairman’s statement: Rio Tinto’s “strong performance” in 2020.
It was no exaggeration. It made pre-tax profits of $15.4bn (£11.2bn) and cut its debts to a negligible $664m. The dividend was raised by 26pc to $5.57, which included a 93 cent special.
Why did it have such a good year? Thanks to the price of iron ore. Rio likes to present itself as a diversified miner but iron ore dominates its operations and its profit and loss account. In 2020 the ore generated $18.8bn in profits on the “underlying Ebitda” measure, while aluminium managed just $2.2bn and copper and diamonds between them the same figure. Energy and minerals accounted for $1.6bn.
As those profits suggest, this is a great time to be digging up iron ore. Its price rose by almost 85pc last year and the reason is not hard to find: China accounts for a huge percentage of the world’s steel production and its consumption of the alloy grew by 9pc last year.
“Iron ore is at a fantastic price for the miners – it is dream time for them,” the manager of a natural resources fund told Questor. He said it was “boom time” in Western Australia – “all the mines are flat out, there is no labour availability, labour cost inflation is horrific”.
Despite this, Rio’s shares don’t look expensive. They have risen along with the iron ore price but yield a tempting 6.9pc if we include the special dividend. The free cash flow yield is in double figures.
Why? “The iron ore price is very high but the market doesn’t think this will continue. It’s literally as simple as that,” another resources investor said. “China accounts for the vast majority of demand and the Chinese are stimulating that side of their economy. No one knows when it will end – it’s a punt.”
Put another way, Rio’s share price ultimately depends on how many roads, airports and bridges the Chinese politburo decides to build. As if this were not already hard enough to predict, those decisions in turn depend on whether the Communist Party favours pursuing economic growth by promoting exports and infrastructure spending, the traditional route, or by encouraging consumer consumption. It has swung between the two in the past and may easily do so again.
Why would you tie your investment returns to the decisions of politicians in a country on the other side of the world, especially when you have little insight into how those decisions are made? Buying shares in Rio Tinto is a gamble pure and simple. Avoid.
Questor says: avoid
Share price at close: £59.26
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