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Rio Tinto Group SWOT & PESTLE Analysis

ID : 5257353 | Aug 2017

OVERVIEW

Name of the Company: Rio Tinto Group

Business Sector: Metals and Mining

Operating Geography: Europe, Australia, United Kingdom, Global

About the Company: Rio Tinto Group is a British-Australian MNC in the field of metals and mining with primary focus on extraction though they also own refining subsidiaries. Established in 1873, the company is headquartered in London, UK. Half of the global assets of the company are housed in the Australian continent with headquarters in Melbourne and offices in Perth and Brisbane. It specializes in production of iron ore, bauxite, coal, alumina, aluminium, uranium, diamonds and salt in Australia.

Revenue: US$ 33.78 bn (FY ending Dec 31st 2016)

SWOT & PESTLE Analysis

The SWOT Analysis for Rio Tinto Group is presented below:
Strengths
Weaknesses
1. Third largest miner in the world with world class and efficient technology
2. Highly diversified company with economies of scale
3. Strong capital discipline and consistent shareholder returns
4. Workforce diversity and strong safety culture
1. Poor mining practices and human rights’ record of Rio Tinto leading to criticism
2. Commodity wise revenue generation not uniform
Opportunities
Threats
1. Aluminum’s demand is slated to rise in future as a substitute to other metals
2. Mine of the Future program with big data analytics to drive productivity
3. Increase in Infrastructure spending can lead to higher demands and opportunities for expansion
1. Weakening demands for iron ore and coal
2. The perception that mining industry is incompatible with sustainable practices.
3. ACF’s proposal to implement a statutory Corporate Code of Conduct in Australia
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Strengths

1. Third largest miner in the world with world class and efficient technology: Rio Tinto is an industry-leader in smelting technology for aluminum smelting; has world class technology for copper extraction and the latest technologies to reduce emissions from products and processes. This has made Rio Tinto the world’s third largest mining company with gross revenues of approximately $54.6bn in 2013. It is preceded only by the two giants Glencore and BHP Billiton. Rio Tinto is also the second largest producer of iron ore in the world with hard to replicate, rare resource bases in Australia. The iron ore sector contributes around 38% of the revenues of the company. Hamersley in Australia (operated by Rio Tinto) is among the top ten largest iron ore mines in the world. The company also has access to large quantities premium quality coking coal. Along with this it owns two of the largest uranium producing mines in the world – Ranger, Australia and Rossing, Namibia as well as rights to one of the largest diamond mines located at Argyle.

2. Highly diversified company with economies of scale: Diversified product and asset portfolio is Rio Tinto’s key strength and differentiates it amongst the Big 3 Mining companies. The assets range from industrial metals, iron ore, coal and uranium, borates and “evergreen” salt harvesting situated across nine countries and 14 time zones globally. Rio Tinto is also leverages on its economies of scale, high levels of productivity and low cost iron ore deposits to counter against the subdued commodities pricing environment.

3. Strong capital discipline and consistent shareholder returns: Rio Tinto delivered a strong operating cash flow of $8.5bn in 2016 and $6.3bn in H1 2017. As of June 2017, Rio Tinto’s long-term debt and capital lease obligation has been substantially reduced and stood at US$7.6b. One of the major focuses of the company strategic report remains to strengthen its balance sheet which it aims to do by lowering capital expenditures and divestment. Furthermore, its strategic move to expand Pilbara operations at a $3bn lower capital cost displayed the improved capital allocation practices of the company. The company has planned a share buy-back totaling $0.5 billion to be undertaken in 2017. Further, the company also delivered a full year dividend of 170 US cents per share with a total cash returns of $3.6 billion to shareholders in 2016.

4. Workforce diversity and strong safety culture: Diverse workforce with an inclusive culture is a key strength of Rio Tinto. It is one of the largest employers of Indigenous Australians with over 8% of the workforce. The company is also committed to reinforce a strong safety culture and maintained focus to eliminate fatalities and accidents with 731,000 critical risk management (CRM) verifications at its operational sites in H1, FY17. The company’s ‘All Injury Frequency Rate’ (AIFR) has also significantly improved since 2012 improving by 34% and stood at 0.44 in FY16. AIFR at Ro Tinto is calculated on the number of injuries per 200,000 man hours of work.

Weaknesses

1. Poor mining practices and human rights’ record of Rio Tinto leading to criticism: Poor Mining practices often led to cultural damage, drug and alcohol abuse, HIV/AIDS, forced resettlement, violence etc which broke the traditional bonds within the indigenous communities. In Mozambique in 2010, Rio Tinto faced protests by the people who were resettled due to Rio Tinto’s mining activities. The allegations were that the company did not fulfill the promises it had made to the displaced population. In other places such as Boron in California, Bougainville in Papua New Guinea, and several other places, Rio Tinto is facing accusations of violating promises made to local settlers. Further, the HR practices of Rio Tinto group are not very employee-friendly. For example, the policy of signing individual workers in coal mines takes away their power of collective bargaining and leads to union members joining hands with NGOs to protest against the functioning of the company.

2. Commodity wise revenue generation not uniform: Rio Tinto group depends a lot on the iron ore division for almost one-third of its revenues. As a result it has increased shipments basing the Pilbara expansion. The Pilbara operations when successfully established will generate a production to the tune of 350 million tonnes a year. However, if there is a substantial correction in iron ore prices, the company’s revenues will be affected.  

Opportunities

1. Aluminum’s demand is slated to rise in future as a substitute to other metals: Aluminum is lightweight and hence can be used in cars to reduce weight and emissions; durable and hence finds it’s used in construction sector; malleable and ductile and hence its demand in the packaging industry. Forecasted increase in shipments from the current 4.12 million tonnes to 4.69 million tonnes in 2021.

2. Mine of the Future program with big data analytics to drive productivity: Rio Tinto’s ‘Mine of the Future’ program has focused on automation across its operations over the last decade which has resulted in significant efficiency and increase in productivity. As of today, each of the company’s haul trucks, processing plants, trains, loaders, and ships are fitted with sensors numbering from hundreds to thousands, and these generate thousands of terabytes of data daily. Rio Tinto has the opportunity to leverage the huge amount of data which can help in leverage further productivity and provide competitive advantage to the company. The insights from the data can help in predictive asset health management, integrated real time digital monitoring systems and other areas which will help in efficiency and cost reduction. To make further progress in ‘Mine of the Future’ program, Rio Tinto launched Analytics Excellence Centre in 2015 in partnership with IGATE which is dedicated to extract analytical insights from the data collected from its operations.

3. Increase in infrastructure spending can lead to higher demands and opportunities for expansion: In developed economies, infrastructure spending is one of the few levers left to support growth at a time when it is stagnant with high unemployment and low borrowing costs. Similarly, in developing and emerging economies, the poor infrastructure acts as a bottleneck in the economic cycle. Thus, this is the right time for increased infrastructure spending.  

Threats

1. Weakening demands for iron ore and coal: China is the world’s largest consumer of iron ore. This iron ore is primarily used to manufacture steel. However China’s growth in iron ore demand decreased from 6.1% in FY13 to 2.7% in FY15. This will certainly put pressure on the prices as the rate of supply will supersede the rate of demand as the surplus of iron ore supply is forecasted to hit a whopping 300mn tonnes in 2017. Similarly the demand for coal is also slated for a decline following China’s stagnant growth over these years, since China accounts for 40% of world’s copper consumption. China is slowly shifting from an investment-led growth model to a consumption-led growth model. Its GDP is expected to decline to 7.1% in 2015 from 7.7% in 2013. China, being a major hub of the company’s various shipments will affect the demand and prices drastically.

2. Perception of mining industry being incompatible with sustainable practices: There is a general perception among the populace that the mining industry including Rio Tinto is synonymous with poor HR policies and non-sustainable practices. This also leads to Rio Tinto being under constant scrutiny on all its activities. As long as this perception is not challenged, the various CSR activities of the company will be of no avail.

3. Australian Conservation Foundation (ACF) proposal to implement a statutory corporate code of conduct in Australia: The ACF has worked with several NGOs to implement a statutory corporate code of conduct which would monitor and evaluate the operations of companies which are major polluters and impose a set of regulations. Further according to a report released by ACF in 2015 which came out with a list of 10 companies which are responsible of 33% of greenhouse gas emissions in Australia, Rio Tinto was the fourth most polluter and the worst mining company. ACF has forwarded a proposal to the federal government for implementation of strict regulations and penalties for the companies’ violating environmental norms. If the proposals are accepted and new set of regulations implemented, it is likely to hinder the nature of operations of Rio Tinto.

Rio Tinto SWOT analysis has been conducted and reviewed by senior analysts from Barakaat Consulting.

References

1. Rio Tinto Strategic Report 2016: http://www.riotinto.com/documents/RT_2016_Strategic_report.pdf

2. Rio Tinto Annual Report 2016: http://www.riotinto.com/documents/RT_2016_Annual_report.pdf

3. Rio Tinto 2016 full year results: http://www.riotinto.com/documents/170208_Rio_Tinto_2016_full_year_results_presentation.pdf

4. Ten companies directly responsible for third of Australia's greenhouse gas pollution, Australian Conservation Foundation report finds: http://www.abc.net.au/news/2015-03-18/ten-companies-responsible-for-third-of-greenhouse-gas-pollution/6330562

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The PESTLE Analysis for Rio Tinto Group is presented below:
Political
Economical
1. High risk to Rio Tinto’s business and assets in countries with political instability1. Slowing Chinese economy to impact iron ore demand
2. Protectionist policies of US administration may impact miners and metal exporters
Social
Technological
1. Criticism faced over social impacts of mining activities 1. Rio Tinto leveraging technology to support productivity programs
2. Investments in lithium battery technology to aid future growth
Legal
Environmental
1. Stringent regulations and changing policies in mining increase business risks
2. Ongoing lawsuits for alleged corruption and license issues may impact profitability
1. Violation of environmental policies a major issue for Rio Tinto
2. Instrumental in forming MMSD study to research on the CSR side of mining
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