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Rio Tinto - returns down as key commodity prices fall

Rio reported full year revenue down 13% to $55.6bn and underlying cash profit (EBITDA) down 30% to $26.3bn.

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Rio Tinto reported full year revenue down 13% to $55.6bn and underlying cash profit (EBITDA) down 30% to $26.3bn. Performance was impacted by higher costs and a drop in realised prices of iron ore, copper, and aluminium.

Free cash flow fell 49% to $9.0bn and there was $4.2bn of net debt at the year end, compared with net cash of $1.6bn at the start of the 2022 financial year.

Management expects inflated costs to continue through 2023 but see an improving economic position with the reopening of China.

The board announced a dividend of $4.92 per share, equivalent to $8.0bn. That's less than half of the record $16.8bn paid the prior year.

The shares were broadly flat in early trading.

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Our view

Rio's full year results highlight the ups and downs of life as a miner. Off the back of record profits last year, prices of key commodities have come back down to earth. It'd be easy to think the wheels were falling off when looking at a profit decline of 30%. But it's testament to just how good conditions were, that even with a rebase in commodity prices, there's still plenty of room for profits.

For now, iron ore is what it's all about for Rio - accounting for 71% underlying cash profits over the half. That's one of the reasons the drops in sales and profits were quite so pronounced. Continued lockdowns in China, the world's largest consumer of iron ore, put pressure on the demand outlook. That picture has changed in recent months, and an end to the zero-covid policy paves the way for a recovery over 2023.

Despite a rebase of prices, one of Rio's main attractions remains very much intact. Its flagship Pilbara iron ore mine isn't the lowest cost producer out there, BHP holds that title, but it's still very efficient. It's not immune to inflation though and costs have been rising, expected in the range of $21.0-22.5 per tonne 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 aluminium and copper, both of which are integral to building things like solar panels, electric cars, and renewable power generation.

Making hay while the sun shines, $5.3bn was invested over 2022 in growth projects. Mainly, $3.0bn to buy out the remaining stake in Canadian mining company Turquoise Hill, which owns a majority stake in what's expected to be one of the largest copper mines in the world.

It's worth noting though, committing cash to a new project, and achieving success are very different things. We're seeing that play out in Serbia, where the government has pulled approval for a $2.4bn lithium-borate project.

Nonetheless, bringing the new strategy to life 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, though the $8.0bn paid over 2022 was still at the top end of the current dividend policy.

All in, Rio has some quality assets and we're supportive of the push into assets that support the global decarbonisation effort. A successful reopening in China 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, so any hiccups will attract pressure.

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: 22nd February 2023