Rio Tinto plc Ordinary 10p (RIO)

Company overview

The Rio Tinto Group is a diversified, British-Australian, multinational mining and resources group with headquarters in London and Melbourne. The company was founded in 1873, when a multinational consortium of investors purchased a mine complex on the Rio Tinto river, in Huelva, Spain from the Spanish government. Since then, the company has grown through a long series of mergers and acquisitions to place itself among the world leaders in the production of many commodities, including aluminium, iron ore, copper, uranium, coal, and diamonds.

HL Comment (4 August 2011)

The group's interim results (04Aug2011) saw the miner reporting a strong half year performance, although profits proved to be below even higher analyst expectations. Record first half underlying earnings of $7.8 billion were generated, an increase of 35pc over H1 2010, although this was below a consensus estimate of over $8 billion. Record first half cash flow from operations was announced, rising by 31pc to $12.9 billion, while group investment or capital expenditure of $5.1 billion was made in the period, compared with $1.8 billion in H1 2010. Strong Asian demand continued to underlie the performance, with the group sweetening its results via a $2 billion increase in its share buy-back programme to $7 billion - to be completed by the end of Q1 2012.

Negative Points:

• Accompanying management comments highlighted the volatile economic environment which continued to exist, driven by significant macro-economic imbalances.
• Volumes were lower than the first half of 2010. Lower volumes were primarily driven by lower iron ore sales, following inclement weather conditions in the first half of 2011.
• The group is experiencing high cost inflation in certain mining hotspots. Coupled with the increasing strength of the Australian and Canadian dollars, this has put pressure on its cost base.
• Net debt increased from $4.1 billion (restated) at 31 December 2010 to $8.6 billion at 30 June 2011 as strong operating cash inflows were offset by outflows relating to capital expenditure, an acquisition, along with the 2010 final dividend and the share buy-back programme.
• The company is exposed to volatile and potentially substantial swings in commodity prices.
• The group remains dependent on global economic growth, particularly for major customers in emerging markets and China.

Positive Points:

• Aided by strong Asian demand and higher commodity prices, record first half underlying earnings have been generated.
• The miner said it would return $7 billion to shareholders, an increase of $2 billion, through a share buy-back programme to be completed by the end of the first quarter of 2012 - subject to market conditions.
• A number of growth initiatives remain ongoing: Pilbara iron ore expansion to 283 million tonnes per annum (Mt/a) on track to complete by end of 2013. The first shipment of iron ore from Simandou is expected by mid-2015 following an agreement with the government of Guinea.
• Management remained positive for the remainder of 2011 and into 2012, in particular given the context of the industry struggling to bring new production on stream.
• An interim dividend of 54 US cents per share was declared, an increase of 20pc of over last year's interim.

Consensus:

On balance, market consensus indicates a strong buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: US dollar.