Rio Tinto Faces Deep ESG Challenges Despite Stellar Dividends in 1H2021

The first half of 2021 for Rio Tinto Limited RIO was a solid one in terms of dividends, as it hit $3 billion amid the approval of the Jadar lithium project. However, the world’s second metals and mining company is investing furiously in climate-related projects and is desperate to restore its social license in Australia after the Juukan Gorge blunder. 

Solid Dividends, Stock Potential

According to an RBC Capital Markets report, better cash flow generation drove higher dividends for Rio Tinto as it announced $9.1 billion in payouts or a 75% payout ratio. 

The company currently holds a Zacks Rank of #2 (Buy) and a Value grade of A in the Zacks Equity Research on Nasdaq, and the stock holds a price-to-earnings ratio of 5.23, well below the industry average of 7.32. 

“Value investors will likely look at more than just these metrics, but the above data helps show that Rio Tinto is likely undervalued currently. And when considering the strength of its earnings outlook, RIO sticks out at as one of the market’s strongest value stocks.”

However, a series of ESG challenges are creeping in since the company ranks as one of the highest carbon-emitting mining firms due to its hefty exposure to iron ore and thermal-powered Pacific Aluminum.

Further, the Juukan Gorge incident has spawned a governance issue that the firm has already started to fix, with all eyes on the outcome.

ESG Challenges

At present, the company can boast about being the only diversified miner that does not extract fossil fuels –coal and petroleum. The company has set sights on reducing emissions by 15% and emission intensity by 30% in the next decade, with 2018 levels as reference. 

By 2050, Rio wants to become carbon neutral, for which it is investing $1 billion on climate-related projects from 2020 through 2024. 

However, the decision to build a coal-fired power plant at Oyu Tolgoi in Mongolia does not help ESG perceptions, while the company is also desperate to shake off the impact of the Juukan Gorge incident.

The firm is also currently renegotiating a deal with the Mongolian government, and any possibility to move forward with the Simandou project in Guinea is also bound to nurture ESG concerns.

A Change In Direction

Ben Wyatt, the first indigenous director of Rio who will join the board in September told The Sydney Morning Herald, “It did strike me very quickly after the Juukan Gorge blast how isolated Rio was within the communities in which they operate in the Pilbara.”

“It was also clear to me that if you don’t have resilience in terms of social support and social relationships, it’s actually not a good outcome for your shareholders.”

The Juukan Gorge affair represents a governance challenge as the blast that destroyed the 46,000-year-old rock shelters triggered stakeholder mayhem and a shareholder revolt for a $10 million bonus, after boss Jean-Sebastien Jacques’ departure.

Taking Action

Since then, besides the appointment of Wyatt as chief advisor, Rio Tinto has taken actions comprising the review of the potential impact on heritage sites in Pilbara, “additional layers of approvals … and the creation of a new standalone Communities and Social Performance Area of Expertise, which is aligned with the existing Health, Safety, Environment (HSE) functions.”

Rio Tinto derives around 75% of energy needs from renewable sources, which is relatively high compared to peers and driven by its differentiated hydropower Alcan business. 

However, the approval of the Jadar lithium project in Serbia will demand the company to strengthen the company’s ESG credentials and rebuilding trust, in the very words of chief executive Jakob Stausholm. Time will tell. 

Disclosure: No positions in any securities mentioned