How Do You Value Rio Tinto?

Towards the end of a research note released on the morning of 2nd February, Investec notes the wide disparity in potential valuations for Rio Tinto. According to data collated by Rio Tinto itself from 29 analysts, the estimates for the net present value of the company (NPV) range from a pretty lowly US$43 billion, or 1,500p per share, all the way up to a punchy US$152 billion, or 5,500p per share. Investec’s own estimates are the Rio Tinto’s NPV stands at around US$113 billion, or 4,400p and this, incidentally, is in line with the overall consensus.

Nonetheless, the disparity at the higher and lower ends just goes to show the effect that the current bout of commodity price instability is having on the market.

Investec forecasts that Rio Tinto will post revenue of just over US$45 billion for the year to 31st December 2014, and with a subsequent dip to US$44.6 billion in the current year. As far as earnings are concerned, the consensus spread for the year just gone is relatively small, but for the current year it widens out dramatically. Thus, Investec’s estimated earnings before interest, tax, depreciation and amortisation in 2014 ring in at US$16.4 billion, while the broker thinks that earnings in 2015 will be nearer the US$15 billion mark.

For 2015 that’s towards the lower end of a spectrum that ranges from around US$13 billion in earnings all the way up to US$23 billion. What a difference commodity prices can make!

Investec reckons the dividend will continue to be hiked, but this assumption finds it in the higher end of the consensus on dividends, as many analysts are also factoring in the possibility of shareholder returns via other means, principally buybacks. Investec forecasts a dividend of US$2.16 per share for 2014 and US$2.43 for 2015. That works out at a relatively punchy yield of around 5.6 per cent.

All told, the broker puts a target of 3,391p on Rio’s shares. But much will depend on commodity prices, levels of capex, and that always imponderable variable, sentiment.