Skip to main content
  • rainbow over text: 'thank you NHS'
  • Register
  • Help
  • Contact us
  • Log out of your HL account

Rio Tinto - COVID-19 interrupts copper project

Emilie Stevens, Equity Analyst | 16 March 2020 | A A A
Rio Tinto - COVID-19 interrupts copper project

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Rio Tinto plc Ordinary 10p

Sell: 4,305.50 | Buy: 4,310.00 | Change 24.50 (0.57%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Rio Tinto announced progress on one of its copper development projects in Mongolia, the Oyu Tolgoi underground mine, is being slowed by coronavirus travel and goods restrictions.

The full impact of the slowdown is yet to be determined, but the group still expects the mine design to be completed in the first half of this year.

Despite disruptions, Rio said the open pit of the Oyu Tolgoi mine continues to operate and deliver shipments of copper concentrate to its customers.

The shares fell 3.6% in early trading.

View the latest Rio Tinto share price and how to deal

Our view

Rio might technically be a diversified miner, but iron ore is really what it's all about - accounting for three quarters of cash profits this year

With production costs at the flagship Pilbara mines under $15 a tonne, Rio's cost of production is incredibly low. Average market prices were in excess of $80 a tonne on average over the first half - digging up some dirt and selling it for five times what it costs is an attractive proposition by anyone's standards.

Of course sensitivity to commodity prices is a curse as well as a blessing. When prices collapsed in 2015/16 as demand from key growth markets like China dried up, Rio was forced to embark on a brutal cost cutting exercise. The group remained profitable, but had a mountain of debt on the balance sheet.

That debt has been reduced to much more manageable levels. Organic cash generation has played a part, boosted by a rebound in prices, and the sale of coal assets also brought in much-needed cash.

With debts back in hand and expenses significantly reduced, Rio can both invest in future capacity to safeguard long term earnings and pass the benefits of higher commodity prices back to shareholders. When times are good the mining mega groups are cash machines, and the heady mix of dividends and buybacks are proof of how rewarding that can be.

Coronavirus and the recent oil price shock continue to rattle markets and while the longer term outlook is still developing, a tougher year ahead seems likely.

China makes up just over 70% of global Iron Ore demand and a sizable slug of global commodity demand generally. Chinese industrial output plunged over the first few months of this year, and despite reports of factories slowly rumbling back into action, as the outbreak disrupts internationally - there's growing recognition that a global economic slowdown could on the cards.

It's still too early to say just what the impact on global commodity prices will be, but if they are hit, Rio will inevitably suffer. This is important because the group says it'll pay out around half of earnings as a dividend every year. If profits fall dividends will too. At the time of writing the shares offer a prospective yield of 7.5%, but as Rio's policy allows it to flex cash expenses in line with market conditions, this is by no means guaranteed.

Register for updates on Rio Tinto

Full year results (26 February 2020)

Full year revenues rose 6.5% to $43.2bn, buoyed by a rise in Iron Ore prices, with underlying EBITDA (earnings before interest depreciation and amortisation) rising 16.9% to $21.2bn.

A final dividend of $2.31 was announced, taking the full year dividend to $4.43, equivalent to 70% of underlying earnings.

Iron Ore revenues rose 29% to $24.1bn with underlying EBITDA rising 41% to $16.1bn. Robust Chinese demand together with constrained seaborne supply meant average Iron Ore prices were 37% higher at $85.9 per tonne. This increase more than offset a 3% drop in production and unit cash costs rising to $14.4per tonne (2018: $13.3 per tonne).

Aluminium revenues fell 15% to $10.3bn with underlying EBITDA declining 26% to $2.3bn - driven by a 15% decline in aluminium price. These results were somewhat offset by higher bauxite sales and lower operating costs.

The Copper & Diamonds division saw revenues fall 10% to $5.8bn with underlying EBITDA falling 25% to just over $2bn. This largely reflects a 7% decline in the average copper price. Both Copper and Diamond production volumes fell over the year reflecting lower quality output.

Energy & Minerals revenue fell 6% to $5.2bn and underlying EBITDA declined 18% to $1.8bn. However, excluding the impact of coal assets which were sold in 2018, profits rose 41%. Production and price improvements in titanium dioxide and iron ore pellets boosted results.

Free cash flow finished the year 31% higher at $9.2bn. This reflects a significant increase in cash generated by operations - largely thanks to higher Iron Ore prices, while capital expenditure remained stable at $5.5bn.

Increased returns to shareholders, and a change in accounting rules meant net debt finished the year at $3.7bn. That's up from a net cash position of $255m last year which was boosted by disposals.

Looking ahead, Rio expect stable economic conditions but are still evaluating any impact of the coronavirus. Next year's Iron Ore shipment is expected to be between 324 - 334 metric tonnes, that's similar to this year's levels but down from previous guidance due to cyclone disruption in Australia. Capital expenditure is expected to be around $7bn, a little less than a third is maintenance spending.

Find out more about Rio Tinto shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.