K2fly Onboards Belgium Based Sibelco for RCubed Solution; Managing well Amidst COVID-19 Situation

FTSE-100 index inched up by 0.47 per cent (on 12th June when the market closed) from its previous day close. The Brent crude oil price was up by 1.04 per cent and WTI surged by 0.39 per cent to USD 38.95 and USD 36.48 per barrel, respectively, on 12th June (when the market closed). The oil prices improved because of the cue of growing demand. Among other macro events trending lately were:

  • S&P 500 had a moderate increase of 1.31 per cent (when the market closed) and closed at 3,041.31 on 12th The index plunged 5.89 per cent (on Thursday 11th June 2020) the most since March 2020.
  • The British economy spiralled downward as the economy tapered by 20.40 per cent in April and 5.80 per cent in March.

Given the development in the oil price, we would like to discuss two resource stocks - Royal Dutch Shell PLC (LON: RDSA) in the energy sector and Rio Tinto PLC (LON: RIO) in the basic material sector. Both stocks are FTSE-100 listed. As on 12th June 2020 (when the market closed) both RDSA and RIO were in green zone and accelerated by 1.64 per cent and 2.25 per cent, respectively. Let us walk through their operational and financial updates.

Royal Dutch Shell PLC (LON: RDSA) – Strong countermeasures taken to protect financial resilience

Royal Dutch Shell PLC is incorporated in the UK. The Company is a global player in energy and petrochemical business. The company reports its operation under four segments, namely Integrated Gas which cover LNG activities, Upstream, which includes crude oil & gas exploration and extraction, Oil Products and Chemicals.

Trading Update – Q1 FY20 as reported on 30th April 2020

  • In Q1 - FY20, the Company reported a revenue of USD 60 billion. Integrated Gas, Upstream, Oil Products and chemical generated revenue of USD 10.1 billion, USD 2.3 billion, USD 44.2 billion and USD 3.2 billion, respectively.
  • The Company generated an organic free cash flow of USD 10.3 billion after divestment proceeds in Q1 FY20.
  • As on March-end 2020, the company had a net debt of USD 74 billion.

Oil and LNG demand

(Source: Presentation, Company Website)

Expected production and utilisation – Q2 FY20

  • The Company expects integrated gas production to be in the range of 840 – 890 thousand boe per day and LNG liquefaction volume to be 7.4 – 8.2 million tonnes.
  • Upstream production is expected to be around 1,750 - 2,250 thousand boe per day with a refinery utilisation of 70 – 80 per cent.
  • Production of chemicals sales volume is expected around 3,000 – 4,000 thousand barrel per day and production of oil products to be around 3,500 – 4,100 thousand tonnes. The utilisation of the chemical plant is expected at approximately 70 - 80 per cent.

Debt Issuance

  • On 7th April 2020, Royal Dutch Shell PLC under its multi-currency debt securities programme issued three bonds of EUR 1 billion each. The bond maturing in April 2024, April 2028 and April 2032 has a fixed rate of 1.125 per cent, 1.500 per cent and 1.875 per cent per annum, respectively.

Recent Company Events

  • On 8th June 2020, the Company paid an interim dividend of USD 0.16 for Q1 FY20. The Group paid a dividend of USD 0.47 for the same period last year.
  • On 19th May 2020, shareholders appointed Dick Boer, Martina Hund-Mejean and Andrew Mackenzie as non-executive directors of the company. Andrew Mackenzie will start his role from 1st October 2020.
  • On 23rd March 2020, the Company renounced the next tranche of its share buyback program due to the economic turmoil and movement in oil prices. However, it will continue with its USD 25 billion share buyback programme launched in July 2018 and plan it to complete by the end of 2020.

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters) -1-Year Chart as of June 12th, 2020, after the market close

The shares of Royal Dutch Shell PLC closed at GBX 1,350.40, up by 1.64 per cent on 12th June 2020. The stock hit its 52-week High of GBX 2,637.50 on 1st July 2019 and low of GBX 946.10 on 19th March 2020. The total outstanding market capitalization stood at around GBP 101.92 billion, with a dividend yield of 9.38 per cent.

Business Outlook

The company guides that as the pandemic unfolds, it will hurt the demand of the oil and gas. If the uncertainty remains, the company might have to cut its oil and gas production. The capacity utilisation of refining, chemical and liquefaction plants may be impacted. The Company has guided to cut its capital expenditure to USD 20 billion or lower for 2020 from the previous budget of USD 25 billion. The operating expense will be reduced by USD 3-4 billion.

Rio Tinto PLC (LON: RIO) – Cutback in capital expenditure

Rio Tinto PLC is headquartered in the UK and listed on London and New York stock exchange. Rio Tinto PLC and Rio Tinto Limited (incorporated in Australia) are viewed as a single corporate entity merged in December 1995. Iron Ore, Aluminum, Copper & Diamonds and Energy & Minerals are the primary products of the company.

Rio Tinto’s wide range of mineral portfolio

Production Update - Q1 FY20 period

  • The company had a robust production in Q1 FY20.
  • The Pilbara iron ore shipment was up by 5 per cent year on year in Q1 FY20. The total shipment was 73 million tonnes as the production resumed post-cyclone Damien in February 2020.
  • The Bauxite production increased by 8 per cent as compared to the same period last year, the total output was 13.8 million tonnes. Bauxite demand was supported by quality and quantity of domestic reserve.
  • Aluminium and copper production was down by 2 per cent and 8 per cent to 0.8 million tonnes and 133 thousand tonnes respectively. The demand for aluminium was lower in the first quarter due to lower automobile production.

Production breakup – Q1 FY20 and Q1 FY19

(Source: Company Website)

Operational Activities in 1Q FY20 and measures during the pandemic

  • The Company has reduced its workforce movement at its various production facilities due to government instruction. Fewer employee changeovers are taking place at its exploration projects in Western Australia.
  • In New Zealand’s Tiwai Point smelter, the fourth pot-line has been closed while the other three are operational to comply with government guidance.
  • The Group spent USD 140 million in Q1 FY20 for exploration, which was up 16 per cent compared to the same period last year. During the period, exploration activities increased at Winu project (copper/gold) in Western Australia and Jadar project (borates/lithium) in Serbia.
  • The breakup of the total exploration expense in Q1 FY20 – central exploration accounted 54 per cent, copper & diamond 32 per cent, energy & mineral 11 per cent and iron ore and aluminium 3 per cent.

2019 share-buyback programme

  • In February 2020, the Company bought shares worth USD 1.1 billion of Rio Tinto PLC, which was part of the total share buyback of USD 3.2 billion by the group.

Performance highlights of FY19 period

  • Rio Tinto generated a revenue of USD 43.1 billion in FY19, which was up by 7.5 per cent year on year.
  • China is the largest market for the company’s iron-ore. The segment generated a gross sale of USD 24 billion in FY19 and made an underlying earning of USD 9.6 billion.
  • Aluminium segment sale was USD 10.3 billion, and earning was 599 million. Copper and Diamond generated sales of USD 5.8 billion, whereas energy and minerals revenue was USD 5.1 billion in FY20.
  • As of December 2019, the company had a net debt of USD 3.7 billion.

(Source: Company Website)

Revenue Breakup – FY19

(Source: Company Website)

Share Price Performance

(Source: Refinitiv, Thomson Reuters) -1-Year Chart as of June 12th, 2020, after the market close

The shares of Rio Tinto PLC closed at GBX 4,596.00, up by 2.25 per cent on 12th June 2020. The stock recorded its 52-week High and Low of GBX 4,979.14 and GBX 2,954.00, respectively. The total outstanding market capitalization of the company is around GBP 77.42 billion, with a dividend yield of 6.69 per cent.

Outlook and Guidance

Covid-19 restricted the movement of goods during the lockdown. The Company has slashed its capital expenditure to USD (5-6 billion) in 2020 from the previous estimate of USD 7 billion. The reduction of capital expenditure planned during 2020 will be expensed in phases over the next two years. The Group has guided that in 2020 the production cost of Pilabara iron-ore will be USD 14-15 per tonne.

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