Comparison Of Financial Performance Of Glencore Plc And Rio Tinto Group In The Mining And Quarrying Industry

Objectives of the Report

The chosen companies for comparing the financial performance are Glencore Plc and Rio Tinto Group. The selected companies operate their business in mining and quarrying industry. Glencore Plc was founded in the year 1948 as a commodity trading and mining company. The headquarter of the company is situated in Baar, Switzerland. It is ranked at 484^th position world’s largest public company. The product offerings of the company include the energy products, agricultural products, metals and minerals products. It has several production facilities all over the world. The supplies of Glencore Plc include minerals, metals, oil products, natural gas, crude oils, natural gas and agricultural products to steel production, power generation and food processing industries (Glencore Plc 2022). The stocks of Glencore Plc are listed on the London Stock Exchange, Hong Kong Stock Exchange and Johannesburg Stock Exchange. More than 135,000 employees are employed in Glencore Plc.

Rio Tinto Group is the world’s second largest metals and mining corporation engaged in producing copper, iron ore, gold, diamonds and uranium. The company was established in the year 1873. Since its establishment, the company has evolved through several mergers and acquisitions (Rio Tinto Group 2022). The stocks of Rio Tinto Group is listed on Australian Stock Exchange and the London Stock Exchange. The main product offerings of Rio Tinto Group include iron ore, copper, bauxite, Aluminium, Gold, Diamonds, Borates, Talc, Salt, Alumina, Molybdenum, Uranium and Titanium Dioxide. Around 45000 employees work for Rio Tinto Group.

Mining refers to the process of extracting materials which are buried under the surface of the earth while quarrying implies extracting of materials from the surface itself. Several activities are involved in mining and quarrying industry such as dust suppression, mineral processing, mining of fossil fuels such as oil and gas extraction, quarrying of sand, stone, and clay, mining of metal ores, phosphate and other form of minerals (Petrova, Tepavicharova and Dikova  2018). The mining and quarrying industry is expected to generate a revenue of USD 51,213 million by the end of 2022 (Statista 2022). The annual growth rate of mining and quarrying industry is expected to be 3.88% for the period from 2022 to 2025.

The main objectives of this report are presented in a brief below:

• To compare the financial performance of two companies operating within the same sector.
• To perform the financial ratio analysis for comparing the performance of Glencore Plc and Rio Tinto Group.
• To understand the theoretical background of capital budgeting decisions and the method adopted by small business for arriving at investment decisions.
• To perform business valuation of Rio Tinto Group and compare it with the market value of company.

The methodology provides the information or approach adopted while completing this report. The main objectives of this paper include the comparison of financial performance of two different entities operating in the same industry. The financial ratio analysis is used to understand and evaluate the two companies. The financial information has been adopted from the annual reports of Glencore Plc and Rio Tinto Group for the year ending 2020 and 2021. The financial ratios of the company are categorized into profitability ratios, efficiency ratios, financial management ratios, overall profitability ratios, and shareholders investment ratios.

Methodology

Qualitative approach have been utilized to understand the method and capital budgeting techniques that are used to evaluate the investment opportunity by the small businesses. In order to complete the fourth objective of the report, which is prepare a valuation of a company, forecast dividend growth model is used. Under this method of business valuation, the intrinsic value of the shares can be calculated using the given formula,

Intrinsic value of Share =  , where,

D1 = Expected Dividend for the next year

r = cost of equity capital

g = Dividend growth rate.

Ratio analysis is one of the most important tools used to analyse the financial position of the company. The financial ratios have been further classified into five categories which include profitability ratios, efficiency ratios, financial management ratios, overall profitability ratios and shareholders’ investment ratios. Each type of ratios for Glencore Plc and Rio Tinto Group have been discussed in detail below:

The profitability ratios of the company help to understand the ability of the company to convert the sales revenue into the profits of the firm (Husain and Sunardi 2020). The profitability position of Glencore Plc and Rio Tinto Group has been identified using the gross profit margin, operating profit margin and net profit margin.

The gross profit ratio represents the percentage of revenue that is left after meeting the direct expenses owned by the firm (Nariswari and Nugraha 2020).  The gross profit margin of Glencore Plc company has increased from 2.60% in 2020 to 6.08% in 2021. However, the company financial profitability has improved slightly from the last year. Glencore Plc is operating under different industry. It is for this reason the gross profit margin is lower than that of Rio Tinto Group. The gross profit margin of Rio Tinto has also increased from 80.97% in 2020 to 84.32% in the year 2021. Overall, Rio Tinto Group has performed better than Glencore in terms of gross profit.

The operating profit represent the profit left after meeting the direct and indirect expenses, excluding any type of interest and tax payments. The operating profit margin has been calculated by dividing the operating income by the net sales revenue generated by the firm. The operating margin of Glencore Plc has increase from -3.59% in 2020 to 3.62% in 2021 whereas that of Rio Tinto has increased from 37.72% to 46.96%.

The financial year 2020 has been a challenging year for Glencore Plc as the company has suffered a loss of US$3946 million.   The net profit margin has been improved in the year 2021 for both the companies. The Glencore Plc ‘s net margin has increased from -2.77% to 2.13% in 2021 whereas that of Rio Tinto Group has increased from 23.31% in 2020 to 35.55% in 2021.

Analysis and Discussion

Profitability Ratios	Glencore Plc	Rio Tinto Group
2021	2020	2021	2020
Net profit margin	2.13%	-2.77%	35.55%	23.31%
Operating Profit Margin	3.62%	-3.59%	46.96%	37.72%
Gross Profit Margin	6.08%	2.60%	84.32%	80.97%

The financial management ratios refer to those ratios that help s the management in understanding and improving the corporate structure of the firm. The ratios that are used for understanding the organizational structure include debt-to-equity ratios, interest coverage, and liquidity ratios such as current ratio and quick ratio. The debt-to-equity ratio of Glencore Plc indicates that the company is dependent on debt for financing its activities whereas that of Rio Tinto Group suggest that the company relies on equity for financing its activities (Anuar and Chin 2016). The interest coverage also reveals that the Rio Tinto Group has higher potential to pay the interest when compared to Glencore Plc. The current ratio of Glencore Plc has increased from 1.10 in 2020 to 1.17 in 2021. The current ratio of Rio Tinto Group was 1.80 and 1.93 in 2020 and 2021, which indicates that the company is not utilizing the available current assets efficiently (Madhushanka and Jathurika 2018). Similarly, the quick ratio indicates that Glencore Plc is not in a position to pay current liabilities using quick assets whereas the quick ratio of more than 1 for Rio Tinto Group shows that the company will be able to pay its current liabilities.

Financial Management Ratios	Glencore Plc	Rio Tinto Group
2021	2020	2021	2020
Debt to equity ratio	0.96	1.11	0.25	0.27
Interest Coverage	15.82	7.35	155.23	89.19
Current Ratio	1.17	1.10	1.93	1.80
Quick Ratio	0.59	0.52	1.50	1.46

The efficiency ratios indicate the ability of   the company in utilizing the assets in generating revenue for the firm (Ganyam and Ivungu 2019). The efficiency ratios used in evaluating the two companies include inventory turnover, trade receivable turnover and trade payables turnover.  The inventory turnover ratio   shows the number of times that the company has replaced its inventory.  The inventory turnover of Glencore Plc was 6.48 and 7.46 whereas that of Rio Tinto Group was 2.30 and 2.13 for the year 2020 and 2021 respectively. The   inventory turnover of Rio Tinto is less than that of Glencore Plc which implies that the company has possibly excess inventory and weak sales. The trade receivables turnover of Rio Tinto Group was much better than Glencore, which shows that the company is efficient in recovering debt from its customers.  In terms of trade payables turnover ratio, Rio Tinto Group has been in a position to utilize the credit facility provided by the suppliers efficiently.

Efficiency Ratios	Glencore Plc	Rio Tinto Group
2021	2020	2021	2020
Inventory Turnover	7.46	6.48	2.13	2.30
Trade Receivables Turnover	11.76	8.95	17.59	13.37
Trade Payables Turnover	7.17	5.52	1.31	1.22

The overall profitability ratios have been analyzed through return on equity, return on assets and diluted earnings per share. The return on assets indicates the ability of generating net income through the use of available assets owned by the firm. The return on equity is calculated by dividing the net income by the shareholder’s equity. The earning per share is calculated using the net income and the weighted average number of outstanding shares. The  ROA of Glencore  Plc has increased from -3.34%  to 3.41% in 2021 whereas that of Rio Tinto Group has increased  from 10.68% to 21.94% in 2021. It means that Rio Tinto has been in a better position in utilizing the assets for generating   income for the firm. Similarly, the ROE of Rio Tinto Group is calculated as 39.89% in 2021, which is much better than 11.78% of Glencore Plc.

Ratio Analysis

Overall Profitability Ratios	Glencore Plc	Rio Tinto Group
2021	2020	2021	2020
Return on Assets	3.41%	-3.34%	21.94%	10.68%
Return on equity	11.78%	-11.47%	39.89%	20.04%
Earning Per share (diluted)	0.37	-0.14	12.95	6.00

The shareholder’s investment ratios have been evaluated using the dividend cover, dividend yield and price-to-earning ratio.  The dividend yield of Glencore Plc has increased from 1.91% to 2.58% whereas that of Rio Tinto Group has increased from 5.13% in 2020 to 10.23% in 2021.   The price to earning ratio indicates that the market price of Glencore Plc was 27.03 times higher than the earnings per share whereas that of Rio Tinto Group is calculated as 5.17 times for the year ended 2021.

Shareholder’s Investment ratios	Glencore Plc	Rio Tinto Group
2021	2020	2021	2020
Dividend cover	143.44%	-119.98%	189.05%	155.40%
Dividend Yield	2.58%	1.91%	10.23%	5.13%
Price-to-earnings ratio	27.03	-43.55	5.17	12.54

There are several capital budgeting techniques that are used by small business to arrive at a particular decision. Generally, capital budgeting is the process of evaluating different potential investment opportunities to make investment decisions. The main goal of capital budgeting is to identify the project or investment that will produce positive cash flows for the firm (Kengatharan 2016). There are several methods used to make investment decisions such as net present value method, payback period and internal rate of return (Siziba and Hall 2021). However, there are others capital budgeting techniques as well such as accounting rate of return and the discounted payback.

The payback period method is used to estimate the time required for recovering the initial investment made by the firm. This method of capital budgeting is often used by startup and fast-growing business (Al Ani 2015). It enables the company to know about how long it will take recoup the amount of money invested into the project. This method does not take into account the ‘time of value of money. It simply projects the future cash flows from a particular project and identifies the point at which the company would breakeven (Markovics 2016). It is calculated by dividing the initial investment by the net cash inflows from the project. The decision rule of investment through payback period says that the investment should only be accepted if the company is able to recover the initial investment within the stipulated time period.

It is the most widely used capital budgeting technique for making investment decisions. The net present value represents the sum of all present values of future cash flows generated by the firm. It considers all form of future cash flows including the initial capital investment. This method indicates the projected profits of the firm from a particular project. In the process of selecting a project from different alternatives, the project with higher NPV should be accepted (Batra and Verma 2017). This method seeks to capture the total value of the investment opportunity. It is often used in financial analysis while determining the feasibility for any project or investment. It is calculated by subtracting the present value of cash outflows from the present value of cash inflows (Ross et al. 2019). The decision rule using NPV method states that the project shall be accepted if it generates positive NPV and rejected if it is negative. While selecting a single project from several alternatives, the project with higher NPV shall be accepted.

The IRR refers to that rate of return in which the NPV of the project becomes zero. This method does not take into account the external factor such as inflation (Banerjee 2015). This method of capital budgeting is used to compare different investment opportunities. For selecting a project for investment, it must be noted that the IRR should always be greater than the cost of capital of the firm. The Internal rate of return estimates the percentage return from an investment. The internal rate of return is derived after considering the estimates of future cash flows of the project. The IRR rule of capital budgeting states that the project shall be accepted only when the IRR is greater than the minimum required rate of return (Arjunan 2019). It helps the entity in deciding whether to proceed with the investment or not.

Business Valuation refers to the process of estimating the economic value of the firm. There are several methods used by the market participants to determine the value of the company. The formula for calculating the economic value is as simple as deducting the total liabilities by the total assets. Different Methods of valuation include asset valuation, relative valuation. Historical earnings valuation, future maintainable earnings valuation and discounted cash flow valuation.

The business valuation has been conducted for Rio Tinto Group listed on the London Stock Exchange. The economic value of Rio Tinto Group is calculated using the Forecasted Dividend Growth Model. There are several assumptions made for determining the market value of the firm. The assumptions that are used in the calculation of economic value of Rio Tinto Group are as follows:

• It is assumed that the dividend will grow at a constant rate of 0.5% in the coming years.
• The expected market return is assumed to be 20%.
• The risk-free rate for the calculation of cost of equity is assumed to be 1.86%, which represents the 15-year government bond yield (UK Investing, 2022).

The other components required for calculating the economic value of Rio Tinto Group include beta of the investment and 1 year forward dividend. The beta of the company is assumed to be 0.55 and expected 1-year forward dividend as 7.93 (Yahoo Finance., 2022). The calculation for intrinsic value of company’s share is as follows:

Expected Growth Rate	0.5%
Current Annual Dividend	$                6.85
Risk-Free Rate	1.86%
Estimated Market Return	20.0%
Beta	0.55
1 Year Forward Dividend	$                7.93
Discount Rate	11.83%
Dividend Discount Model Fair Value:	$             69.96
Market Share Value	$             66.94

USD Millions	2020	2021
Outstanding shares	$            1,629.10	$     1,629.10
share price in dollars	$                 75.22	$           69.96
Minority interest	$            4,849.00	$     5,158.00
Debt	$          14,015.00	$   14,169.00
Cash	$          10,381.00	$   12,807.00
Enterprise value	$       131,023.90	$ 120,494.84
Net worth in billions	$      131.02	$ 120.49

The discount rate represents the cost of equity of the firm using the CAPM model. The Capital Asset Pricing Model helps in understanding the relationship between the risk of security and the expected return (Fernandez 2015). The formula used for calculating the cost of equity is shown below:

CAPM = Risk free rate + Beta * (expected market return – risk free rate)

The dividend growth model of valuation shows that the fair value of company’s share was $69.96 whereas the actual market value of Rio Tinto Stock is $78.38. This means that the company’s market price is overvalued. The enterprise value of the company is obtained using the formula given below:

Enterprise Value = Debt + Equity – Cash

The market capitalization shows that the market value of the company is of worth US$133.288 billion. However, it is calculated as $115.57 billion and $131.02 billion for the year 2021 and 2022. Overall, the stocks of Rio Tinto Group are overvalued as compared to its fair value.

The assumptions made for calculating the intrinsic value of Glencore Plc are as follows:

• It is assumed that the dividend will grow at a constant rate of 3% in the coming years.
• The expected market return is assumed to be 8%.
• The risk-free rate for the calculation of cost of equity is assumed to be 1.82%, which represents the 15-year government bond yield (UK Investing, 2022).

Expected Growth Rate	3.0%
Current Annual Dividend	$ 0.26
Risk-Free Rate	1.86%
Estimated Market Return	8.0%
Beta	1.52
1 Year Forward Dividend	$ 0.52
Discount Rate	11.20%
Dividend Discount Model Fair Value:	$ 6.35
Market Share Value	$ 10.08

USD Millions	2020	2021
Outstanding shares	13217	13337
share price in dollars	$                   7.49	$           6.35
Minority interest	$                 3,235	$           3,014
Debt	$               38,167	$        35,351
Cash	$                 1,498	$           3,241
Enterprise value	$             138,899	$      119,748
Net worth in billions	$              138.90	$       119.75

The stocks of Glencore Plc were largely overvalued at the year ending 2021. However, the market value derived from dividend value model is not considered to be much accurate as it is highly dependent on the assumptions made regarding the growth rate in dividend.

Conclusion

From the above discussion, it becomes clear the financial performance of Rio Tinto Group was better than the Glencore Plc. The outcomes of this report in relation with the business valuation is limited in the sense that the results are highly dependent on the assumptions made while estimating the economic value. The ratio analysis is one of the most important tools that are used in evaluating the financial performance of the company. The profitability ratios suggests that the Rio Tinto Group has been able to convert larger amount of sales revenue into the actual profits of the firm. The debt-to-equity ratios also suggest that the company is better in utilizing the equity fund for financing the activities of the business. However, the company needs to focus on liquidity position as the ratio of around 2 indicates that the company is not utilizing the current assets to the fullest. However, the percentage of dividend distributed by the company various largely from one period to another. The theoretical aspects of capital budgeting reveals that the small business utilizes several techniques for making capital budgeting decisions such as payback period method, net present value method and internal rate of return method. Overall, the potential investors should invest in Rio Tinto Group due to better profitability and higher return to investors in the form of dividend.

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