Company Analysis: Rio Tinto Coal Australia - Assignment Example

? COMPANY ANALYSIS RIO TINTO COAL AUSTRALIA Executive Summary In this report, how far Rio Tinto Coal Australia has been successful in terms of its strategic, financial, market and corporate social responsibility performance is critically examined. The financial performance is analyzed in terms of the financial ratios and the share prices. The competitive scenario of Rio Tinto Coal is examined with the help of Porter’s five forces analysis. SWOT Analysis is done to examine the strengths, weaknesses, opportunities and threats of each company. The vision of the company is to become a international leader in the mining field, which is highly competitive and sustainably developed as well as performs well through innovation. Based on the objectives and strategy, it can be seen that sustainable development is one of the underlying principles of the company’s operation. All the Porters five forces act in favour of Rio Tinto Coal. Hence the competitive landscape for the company is good. The Rio Tinto has been selected as one of the top performers regarding the disclosure of corporate governance practices with an overall score of 62 percent by the ACCA. The company also identifies stakeholder engagement as one main step for success. All the environmental performance indicators started declining from 2006 to 2009 for the group. In spite of all the measures to improve the environmental performance, there are several criticisms against the group for which severe measures are needed. Social well being indicators also are found to be declining. The financial performance showed strong performance for the group in the period of analysis. The group outperforms all the three market indices till mid 2008, then shows a decline and is slightly recovering from mid 2009 onwards. Thus it showed evidence for weak market efficiency also. Though Rio Tinto has a highly effective corporate governance mechanism and a good financial performance, it is highly socially irresponsible creating environmental problems and health problems to the employees as well as surrounding community. Hence, the company cannot be considered as a successful company in terms of financial criteria but not in non financial terms. Hence, it cannot be considered as completely successful based on the definitions of ethical investments. Moreover, it has failed to achieve the objective of sustainable development, which is one of its underlying principles for business. This is in spite of the significant measures performed by the group to improve its social and environmental performance. This needs to be seriously considered by the company. Company Analysis-Rio Tinto Coal Australia 1. Introduction Rio Tinto Coal, Australia is one of the world’s largest mining group, which consists of two sub companies namely Rio Tinto Plc in UK and Rio Tinto Limited in Australia (Rio Tinto Coal, 2011a).Their offices are located mainly in Australia and North America and also in Europe, Asia, South America and Africa (Rio Tinto Coal, 2011a).The main products of Rio Tinto Coal Australia include cooking coal, thermal coal as well as sales and marketing contacts (Rio Tinto Coal, 2011b).The main operations of the company are in Hail Creek Mine, Clermont Mine, Blair Athol Mine and Kestrel Mine. The company has many stakeholders and shareholders in Australia including customers, suppliers, government and community groups. In this report, how far the mining company has been successful in terms of its strategic, financial, market and corporate social responsibility performance is critically examined. The main objectives of the report are to examine the strategic performance of the company, to examine the financial performance of the company, examine the market performance of the company and to examine the corporate social responsibility performance of the company. The main data sources used are the annual reports as well as other sources available on the company’s website, newspapers, magazines and online data bases. In the next section, the strategy analysis of the company is done. In the third section, corporate governance and social responsibility performance is examined .In the fourth section, financial performance is analyzed. In the fifth section, conclusions and recommendations are reported. 2. Strategy Analysis According to Waal(2007,p 24),strategic performance management is defined as “ ‘the process where steering of the organization takes place through the systematic definition of mission, strategy and objectives of the organization, making these measurable through critical success factors and key performance indicators, in order to be able to take corrective actions to keep the organization on track”. Hence based on this definition, an organization is said to have successful performance if it has achieved financial and nonfinancial targets, development of skills and competencies and the improvement of customer care process and quality. Hence, for evaluating whether an organization has achieved success or not, the targets need to be identified first. These are evaluated by the mission and vision statements and the long-term objectives. Then whether these targets have been achieved or not need to be evaluated based on external and internal analysis and the generic strategies adopted. Both the strengths and weaknesses of the company need to be evaluated to build on the strengths and opportunities and also to take remedial actions for the deficiencies to keep the organization on track. Thus, the success of the company is analyzed through the concepts of mission and vision statements, external and internal analysis and generic and grand strategies adopted. 2.1.Objectives,Mission and Vision Shareholder return maximization is the main objective of the company through sustainable utilization of natural resources (Rio Tinto Coal, 2011c).For achieving this objective, the strategy of the company is investment and operation in mines and businesses which are huge and cost competitive. The selection criteria for these mines and businesses are the quality rather than choice of commodity (Rio Tinto Coal, 2011c).Thus based on the objectives and strategy, it can be seen that sustainable development is one of the underlying principles of the company’s operation. The vision of the company is to become a international leader in the mining field, which is highly competitive and sustainably developed as well as performs well through innovation (Rio Tinto Coal, 2011c). 2.2. Competitive Scenario The Australian mining industry is one of its main contributors to the economy and infrastructure (Australian Bureau of Statistics, 2001). Hence, the competitive scenario in this industry is also report5ed as high (Australian Bureau of Statistics, 2001). Table1: Comparative Market Share of Rio Tinto Coal Source: IUCN (2007) The above table shows that Rio Tinto is the second biggest in terms of market capitalization and mining market share when compared to its key competitors, BHP Bilton and Anglo American. Porter’s five forces are used for analyzing the specific environment factors affecting a company’s strategic decisions based on the model of the five competitive forces by Porter (1980). Porter’s model is based on the insight that a corporate strategy should meet the opportunities and threats in the organization’s external environment. This model includes the analysis of determinants of the intensity of competition and profitability of the industry like bargaining power of buyers, bargaining power of suppliers, threat of entry of new competitors, threat of substitutes and competitive rivalry (Pavlicek, 2008).The competitive scenario of Rio Tinto Coal is examined with the help of Porter’s five forces analysis. Threat of Entry of New Competitors Reports show that the mining industry in Australia is mainly controlled by the private sector and hence the entry barriers are very low (Australian Bureau of Statistics, 2001).Moreover, the 1990s is well known for consolidation of the mining industry with the acquisition of smaller projects by larger companies (Australian Bureau of Statistics, 2001).Hence, the threat of entry of competitors is very high in this industry. In spite of this, Rio Tinto maintains strong market position with a wide range of products compared to the competitors. Bargaining Power of Buyers The company has branches all over the world and hence has diversified range of customers. Hence the bargaining power of customers is low. Bargaining Power of Suppliers The company has built strong relationships with its suppliers in different parts of the world. Hence the bargaining power of suppliers is low. Threat of Substitutes Rio Tinto is called the world’s biggest or second biggest or third biggest mining company in the world with high quality products (IUCN, 2007).Hence, the threat of substitutes is low. Competitive rivalry The main competitors of the company are Alrosa Co Ltd, Asarco LLC and Alcoa Inc (Hoovers, 2011). These three competitors focus on less number of products than Rio Tinto (Hoovers, 2011).Hence the threat of competitive rivalry is low for Rio Tinto. Thus, the above analysis shows that all the Porters five forces act in favour of Rio Tinto Coal. Hence the competitive landscape for the company is good. 2.3. SWOT Analysis The word SWOT stands for strengths, weaknesses, opportunities and threats (David, 2004).For the SWOT analysis, both the internal resources(strengths and weaknesses) and the external factors(opportunities and threats) need to be considered (Oxford University Press, 1998). The evaluation of internal factors need to be done in areas such as company culture and image, organizational structure, key staff, access to natural resources, position on the experience curve, operational efficiency and capacity, brand awareness, market share, financial resources, market shares, exclusive contracts, patent and trade secrets(Bennet,1999). The evaluation of external factors need to be done related to customers, competitors, market trends, suppliers, partners, social changes ,new technology, economic environment, political and regulatory environment(Bennet,1999).The SWOT analysis summarizes these internal and external factors as a list of strengths, weaknesses, opportunities and threats . That is used as the basis of strategy formulation, implementation etc. The results of SWOT analysis for Rio Tinto Coal are given below. Strengths One main strength of Rio Tinto can be shown as its strong market position (table1) with a leading producer of many commodities. In addition to mining, the company also has its operations as refining bauxite and iron. The company also has the advantage of being the fourth largest publicly listed one in the world .The company’s wide product range including aluminium, copper, diamonds, coal, iron ore, uranium, gold and industrial minerals is its another strength(Rio Tinto Coal,2011b). The efficient resource utilization and strong policies against corruption are the other strengths of the group(IUCN,2007). The strong growth prospects of the company with high financial performance and high operating margin through doubling the earnings is the fourth strength of the group. The increasing market share of the company is another strength of the group. Weaknesses The main weakness of the company is its production centres which are restricted to Australia and North America. This has resulted in huge transportation costs for carrying minerals and metals to emerging markets .The huge long term debt of the group is another weakness. The assets in illiquid form have resulted in weak liquidity position of the group, which is its other weakness. A long term reputation of being socially irresponsible creating environmental and health problems to the surrounding community, high incidences of workplace accidents, violation of Global Compact are other weaknesses of the group. Opportunities The rising demand for the products of the group especially coal in Asian markets is an opportunity for the group. Reports show this demand more than expected in Asian markets (Market Watch, 2011). Threats The decline of the demand for coal in US can be considered as a threat to the group (Market Watch, 2011). High environmental awareness and awareness of social responsibility among customers is another threat to the group. 3. Corporate Governance and Social Responsibility In Rio Tinto, a common approach to corporate governance system is adopted complying with the rules published by the listing authorities of UK and Australian Exchange The reporting system involves true and fair view in the financial statement preparations. It is claimed that the group communicated effectively and timely with the shareholders and investor community .Moreover the group claims to have effective risk management techniques (Rio Tinto, 2010d). The Rio Tinto has been selected as one of the top performers regarding the disclosure of corporate governance practices with an overall score of 62 percent by the ACCA (ACCA, 2009). The group had an overall score of 90 percent in their disclosure of governance processes as selected by ACCA (2009). The main stakeholders of Rio Tinto are government, communities, customers and contractors, investors, media, partners, suppliers and other organizations like NGOs and academic organizations (IUCM, 2007).Stakeholder engagement is identified as the main way for success by the group. Reports show the evidence of significant consultations with the stakeholders in the decision making process of the group (IUCN, 2007).As stated in their vision statement itself, the first priority of the group is the health and safety of employees. To ensure the proper functioning and implementation of the community policy and the maintenance of community policy and standards, internal assurance mechanism is launched by the group. The relationships with media, customers and suppliers are also considered important by the company (IUCN, 2007). Rio Tinto is the world’s mining company whose main products include metals and minerals like aluminum, copper, diamonds, energy products, gold, industrial minerals that are needed or humanity and improvement of living conditions of people all over the world (Rio Tinto, 2010c).The company claims respect to environment as one of its main strategy and ensures minimum possible effects of the group’s activities on the environment (RioTinto, 2010). The following indicators show the extent of corporate governance and social responsibility of the group. Health and Safety Indicators Source: Rio Tinto Coal (2010) The above indicators show the health and safety performance of the group over 2006 to 2010.It shows a gradual decline in all injury frequency rate over time for the group. Though the above figure shows a gradual decline in the indicators, still the rate is above zero percent harm which needs to be stabilized through safety and risk management procedures. People Source: Rio Tinto Coal (2010) The above figure shows employee turnover rate very less showing the strong relationships with the employees of the group through professional development, training and compensation benefits. The indicators below show the performance of environment and communities of the group. Environment and Communities Source: Rio Tinto Coal (2010) The figure above shows a decline in environmental incidents frequency rate from 2008 to 2010 and also in the number of environmental incidents for the group. The figure below shows that there are fluctuations in the freshwater consumption of the group from 2006 to 2010.It has increased significantly in 2010 though the target is very lower than this. Source: Rio Tinto Coal (2010) The figure below shows an increase in non mineral waste from 2009 to 2010 and at the same time in the proportion of waste recycled for the Rio Tinto Coal group. This shows a rise in the environmental indicator. Source: Rio Tinto Coal (2010) The figures below shows the amount of greenhouse gas emissions fluctuating from 2006 to 2010.Howver the target of the group of 1.46 is not achieved by the group. Both the figures below show the same trends from 2006 to 2010. The following tables 1 and 2 show the operating and financial performance of the Rio Tinto Coal group in 2010.They show the achievement of the targets in terms of operational and financial performance of the group. Table1 Table2 The environment indicators shown in the above table, however give a different picture .It can be seen that most of the indicators show poor and declining performance from 2005 to 2009.Moreover, significant environmental incidents also have shown a rise in number in the period of analysis. The social wellbeing indicators however show slight improvement in the period of analysis except fines and prosecutions for safety. The Rio Tinto group has developed many codes and procedures regarding the environmental performance. Since1996, the group has started publishing the review of its social and environmental performance every year. Based on this, the group reviews weather the targets for social and environmental performance has been achieved in accordance with their policies. The main positive features of these reviews include good clarity, constant improvement based on commitment, revealing both good and bad sides of the group’s performance etc(IUCM,2007).At the same time the reviews are criticized for the following ignorance of the diamond industry related problems, ignorance of ethical supply chain management, ignorance of community dependency, ignorance of news on cross consultations with stakeholders, ignorance of policy reviews on corruption, bribery etc(IUCM,2007).Moreover, the environment performance and social performance of the group is criticized as not following international standards or treaties according to many sources(IUCM,2007).In addition to all these, many media sources criticize the group for many negative incidents. The following are some examples. The killing of Rio Tinto Coal employee at the Spring Creek Mine, US is criticized by Billing Gazette (Billing Gazette, 2006).Moreover, media criticize the group for mining operations that are destructive to the ecosystems of a nation particularly in Madagascar (IUCM, 2007).The group is also blamed for illegal uranium mining in Mexico, high abdominal cancer rate in the uranium mine site etc. Reports show that Rio Tinto has a reputation of being responsible for environmental and human rights violation for a long time. More specifically, it is reported that the company has violated Principle 1 and Principle 8 of the Global Compact. Further, reports show several serious incidents of the company causing environmental abuses affecting the health of the surrounding community (Kenendy, 2010). Hence in spite of all the measures to improve the environmental performance, there are several criticisms against the group for which severe measures are needed. 4. Financial Performance . The figure below shows that the earnings of Rio Tinto declined in 2009 after a rise in 2008.The amount of debt declined in 2009. Rio Tinto Financial Data Source: RioTinto(2010) Source: RioTinto(2010) Source: Rio Tinto(2010) The three main financial statements are balance sheet, income statement and the cash flow statement (Tracy, 2004). Financial Statements of a company are intended to give valuable information about the financial health of the company to its owner investors and lenders (Tracy, 2004). In other words, they are supposed to give information about the financial position, performance and changes in financial position of the company. It gives information about a company’s assets, liabilities, profits and losses. These are a major source of financial information that helps the users in making decisions about economic activities. The three main financial statements are balance sheet, income statement and the cash flow statement (Tracy, 2004). The balance sheet shows the company’s assets and liabilities, cash flow statement shows where the company’s money is spent and income statement shows the company’s profitability. Based on these three financial statements, financial ratios can be calculated. The financial ratios as such cannot tell exactly about the strengths and weaknesses of a company. It needs to be related to several other useful information regarding a company to get meaningful results. Moreover, these calculated financial ratios need to be compared with the financial ratios of the industry as a whole or to other company in the same industry to interpret the financial health of the company. For getting information about the historical performance of the company, the financial ratios need to be compared over time (Ketz etal, 1990). The main financial ratios are predictor ratios, profitability ratios, asset management ratios, liquidity ratios and debt management ratios (Fridson and Alvarez, 2002). Predictor ratios suggest whether the company will grow or fail. Profitability ratios show the return on sales and capital employed. Asset management ratios show the efficiency of a company. Liquidity ratios denote the solvency of a company. Debt management ratios denote the extent of debt in the capital structure of a company (Fridson and Alvarez, 2002). Table 3: Financial Ratios Rio Tinto Return on Capital post tax EBITDA Margin EBT Margin Net debt to total capital Operating Margin Earnings per share Dividend cover 2005 32% 45% 37% 5 37 312.5 4.3 2006 40% 49% 42% 11 42 456.2 6.7 2007 24% 42% 34% 63 34 464.9 4.9 2008 19% 36% 32% 63 32 200 5.3 2009 12% 33% 24% 29 24 301.7 7.2 Source: Rio Tinto (2010b) Table 3 shows that the return on capital post tax (adjusted underlying earnings+ net post tax interest+ outside interest/total equity+ net debt) show huge decline from 2007 onwards. EBITDA Margin (adjusted profit before tax, interest and depreciation/ gross turnover) and EBT Margin (adjusted profit before tax and interest/gross turnover) and operating Margin also show decline from 2007 onwards. The earnings per share and dividend cover show recovery from 2008 and 2007 onwards while the amount of debt has declined in 2009. The market efficiency has been examined based on the historical share price movements, volume and the comparison of the share price movements with that of the market index. There are three forms of market efficiency. They are the strong, semi strong and weak form of market efficiency. Based on the strong form of market efficiency, the historical share prices needs to reflect all information available to the participant. Most studies have rejected the strong form of market efficiency and have obtained evidence in favour of weak form of market efficiency. Weak form of market efficiency can be examined from the fundamental analysis of share prices and the comparison of the share prices of a company with that of market index. This shows the performance of a company in relation to the movements in the market. The next figure shows the share price performance of RioTinto Group. Figure above shows the share price movements of Rio Tinto in comparison with FTMC, Dow and FTSE. It shows the group outperforms all the three market indices till mid 2008, then shows a decline and is slightly recovering from mid 2009 onwards. 5. Conclusion Based on the definitions of ethical investment, a company needs to be selected for investment based on both financial and non financial criteria (Cowton, 1994). In other words, the company needs to perform well in terms of financial investments .At the same time, the products of the company should not cause any environmental damage, should not cause any health problems to the consumers or treat the people with disrespect (Sparkes, 2002). Thus in this report, the recommendations regarding the success of Rio Tinto are done on the basis of both financial and non financial criteria. The report analyzes the company in terms of their financial performance, corporate governance performance, environmental protection credentials and contextual factors. The financial performance is analyzed in terms of the financial ratios and the share prices. SWOT Analysis is done to examine the strengths, weaknesses, opportunities and threats of each company. The data for analysis is collected mainly from the websites of these companies and their annual reports. The vision of the company is to become a international leader in the mining field, which is highly competitive and sustainably developed as well as performs well through innovation. The competitive scenario of Rio Tinto Coal is examined with the help of Porter’s five forces analysis. Thus, the above analysis shows that all the Porters five forces act in favour of Rio Tinto Coal. Hence the competitive landscape for the company is good. The Rio Tinto has been selected as one of the top performers regarding the disclosure of corporate governance practices with an overall score of 62 percent by the ACCA. The company also identifies stakeholder engagement as one main step for success. All the environmental performance indicators started declining from 2006 to 2009 for the group. In spite of all the measures to improve the environmental performance, there are several criticisms against the group for which severe measures are needed. Social well being indicators also are found to be declining. The group outperforms all the three market indices till mid 2008, then shows a decline and is slightly recovering from mid 2009 onwards. Though Rio Tinto has a highly effective corporate governance mechanism and a good financial performance, it is highly socially irresponsible creating environmental problems and health problems to the employees as well as surrounding community. Hence, the company cannot be considered as a successful company in terms of financial criteria but not in non financial terms. Hence, it cannot be considered as completely successful based on the definitions of ethical investments. References ACCA(2009): “Research Finds Corporate Governance Disclosures Not Priority for ASX502”, http://www.accaglobal.com/databases/pressandpolicy/australia/3266620, Accessed August 23 2011. Australian Bureau of Statistics(2001): “Special Article - The Australian Mining Industry: From Settlement to 2000 (Oct, 2000)”, http://www.abs.gov.au/ausstats/abs@.nsf/94713ad445ff1425ca25682000192af2/93136e734ff62aa2ca2569de00271b10, Accessed August 23 2011. Bennett, R. (1999). “Corporate Strategy”, 2nd Edition, Glasgow: Bell & Bain Ltd. Cowton, C. J. (1994). 'The Development of Ethical Investment Products.' Published in The ACT Guide to Ethical Conflicts in Finance, p. 213-232. Oxford, UK: Blackwell Publishers. David, R. F. (1997). “Concepts of strategic Management”, 5th Edition, New York: Simon & Schuster Inc. Fridson MS and F Alvarez (2002): “Financial Statement Analysis: A Practitioner’s Guide”, New York: Wiley. Hoovers(2011): “Rio Tinto Limited” ,http://www.hoovers.com/company/Rio_Tinto_Limited/htsxki-1.html, Accessed August 23 2011. Kenendy D(2010): “Rio Tinto: The Global Compact Violator”, http://www.corpwatch.org/article.php?id=622, Accessed October 2 2010. Ketz JE, R K Doogar and D E Jensen (1990): “A cross-industry analysis of financial ratios: comparabilities and corporate performance”, New York: Quorum Books. Market Watch (2011) : “Rio Tinto: Coal producers focusing on Asia markets”, http://www.marketwatch.com/story/rio-tinto-coal-producers-focusing-on-asia-markets-2011-03-03, Accessed on August 22 2011. Oxford University Press. (1998): “The Oxford dictionary for international business”, 2nd Edition, Great Britain: Market House Book Limited Pavlicek J (2008): “Definition of the Company Strategy”, Proceedings of the World Congress on Engineering 2008, Vol III, WCE 2008, July 2 - 4, 2008, London, U.K. Porter E M (1980): “Competitive Strategy: Techniques for Analyzing Industries and Competitors”, New York: Wiley. RioTinto Coal(2010): “RioTinto Coal Australia Sustainable Development Report”, Rio Tinto(2010a): “Rio Tinto Limited”, http://www.riotinto.com/shareholders/12301_share_price_limited_12512.asp?page=sharePriceChartNewASX&noVolumes=false&period_param=&fromDay=01&fromMonth=11&fromYear=2005&toDay=01&toMonth=01&toYear=2010&Calculate..=Redraw+Graph, Accessed October 2 2010. RioTinto(2010b): “Rio Tinto Chart book”, RioTinto Publication. RioTinto(2010c): “Our Products”, http://www.riotinto.com/whatweproduce/218_our_products.asp, Accessed October 2 2010. Rio Tinto(2010d): “Corporate Governance”, http://www.riotinto.com/shareholders/219_corporate_governance_new.asp, Accessed October 2 2010. RioTinto Coal(2011a) : “At a Glance”, http://www.riotinto.com/aboutus/19602_overivew.asp RioTinto Coal(2011b) : “Our Products”, http://www.riotintocoalaustralia.com.au/ouroperations/34_our_products.asp RioTinto Coal(2011c) : “Strategy and Vision”, http://www.riotinto.com/aboutus/19602_strategy.asp RioTinto Coal(2011d): “Strategic Context”, http://www.riotinto.com/annualreport2010/overview/strategic_content.html Sparkes, R. (2002). “Socially Responsible Investment - A Global Revolution”. Chichester, UK: John Wiley & Sons Ltd. Tracy J A (2004); “How to read a financial report: bringing vital signs out of the numbers”. New York [u.a.]: Wiley. Waal, A. A. de.(2007.): , “Strategic Performance Management, A Managerial and Behavioural Approach”, London :Palgrave MacMillan Read More