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Rio Tinto - dividend cut as lower prices pull profits down

Rio Tinto reported a 10% drop in half-year revenue to $26.7bn and underlying cash profit (EBITDA) fell 25% to $11.7bn.

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Rio Tinto reported a 10% drop in half-year revenue to $26.7bn and underlying cash profit (EBITDA) fell 25% to $11.7bn.

Performance was impacted by lower prices across core commodities and higher costs, offset to some degree by higher iron ore sales.

Free cash flow fell from $7.1bn to $3.8bn, largely due to lower profits. Net debt, rose $0.2bn from the start of the year to $4.4bn.

The board has proposed a dividend of $1.77, down 34% and in line with the policy of paying out 50% of underlying earnings.

The shares fell 2.1% in early trading.

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Our view

Rio's half year results highlight the ups and downs of life as a miner. Prices of key commodities have come down and costs pushed higher which has ultimately hurt the bottom line.

For now, iron ore is what it's all about for Rio - accounting for 77% underlying cash profits over the half. Performance here was encouraging, lower prices still hurt but higher volumes provided a welcome buffer as the Gudai-Darri mine ramps up to capacity.

Question marks remain around the demand picture from China, the world's largest consumer of iron ore, as its post-Covid recovery hasn't progressed as quick as some would like. Fresh stimulus is welcome, but it's a key area and one that's adding an element of doubt to the demand picture.

Despite a rebase in prices, one of Rio's main attractions remains very much intact. Its flagship Pilbara iron ore business is the group's cash cow. It's not immune to inflation though and costs have been rising, but we're starting to see the rate of increase ease with costs expected in the range of $21.0-22.5 per ton for 2023.

Looking further afield, Rio's made the strategic choice to push away from iron ore into metals that contribute to global decarbonising efforts. The group already has exposure to aluminum and copper, and is building exposure to lithium.

These are integral to building things like solar panels, electric cars, and renewable power generation and where we see the biggest scope for price rises over the medium term as the energy transition picks up pace.

It doesn't come cheap though, $7bn is expected to be spent on capital expenditure over 2023. That's forecast to rise to $10bn over 2024-25, with up to $3bn earmarked for growth.

That level of spend is propped up by a resolute balance sheet. Lower profits and associated cash flows mean net debt has risen, but it's still in a very healthy position. Another implication of lower profits is lower shareholder returns, given dividends are based on the level of earnings.

All in, Rio has some quality assets and we're supportive of the push into assets that support the global decarbonisation effort. If stimulus efforts in China take hold, that would act as a tailwind for the iron ore portfolio. But that's reflected in a valuation that's ahead of the longer-term average, and the shorter-term demand picture is a little murky.

Environmental, social and governance (ESG) risk

Mining companies tend to come with relatively high ESG risk. Emissions, effluences and waste, and community relations are key risk drivers in this sector. Carbon emissions, resource use, health and safety and bribery, and corruption are also contributors to ESG risk.

According to Sustainalytics, Rio Tinto's management of material ESG issues is strong.

There are comprehensive policies and strong management programmes that address material ESG issues and it has adopted a 2050 net zero climate change target for Scope 1 & 2 emissions across operations. But in recent half-year results, management warned its interim target of a 15% reduction by 2025 would not be met without the use of carbon offsets.

ESG data sourced from Sustainalytics

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Rio Tinto key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 26th July 2023