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Rio Tinto - weaker economic outlook pushes prices down

First half revenue fell $3.3bn to $29.8bn, largely a result of lower commodity prices relative last year as the global economic outlook weakens...

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First half revenue fell $3.3bn to $29.8bn, largely a result of lower commodity prices relative last year as the global economic outlook weakens. Lower revenue and higher costs meant cash profit (EBITDA) fell 26% to $15.6bn.

The group announced an interim dividend of $2.67, representing 50% of underlying earnings.

The shares fell 3.5% following the announcement.

View the latest Rio Tinto share price and how to deal

Our view

With the global economic outlook looking gloomy, the ups and downs of life as a miner are really showing their true colours. Off the back of record profits last year, prices of key commodities have come back down to earth.

Looking at the half year results comparisons, it'd be easy to think the wheels were falling off. But testament to quite how good conditions were last year, even with a rebase in commodity prices, there's plenty of room for profits.

For now, iron ore is what it's all about for Rio - accounting for two thirds of underlying cash profits over the half. That's one of the reasons the drop in sales and profits were quite so pronounced. Last year's strong demand from China has subsided as continued lockdowns put pressure on the economic outlook. As the world's largest consumer of iron ore, that's bad news for Rio.

Despite the potential for easing demand, one of Rio's main attractions remains very much intact. Its flagship Pilbara iron ore mine produces at incredibly low costs, expected in the range of $19.5-$21.0 per tonne this year. Compare that to iron ore prices over the first half, at around $120 per tonne, and that leaves room for healthy profits.

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, Rio recently announced it was buying the remaining shares in Canadian mining company Turquoise Hill for $2.7bn. The deal will boost Rio's stake in what's expected to be one of the biggest 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. A $0.3bn net cash position frees up cash for acquisitions or shareholder returns.

Rio's exposure to iron ore demand and China could cause some short-term headwinds. That's reflected in a valuation that's come down this year, now below the longer-term average. Coupled with a 10.6% prospective dividend yield, which we'd expect to come down as profits normalise, and markets aren't overly confident the good times are here to stay. We still think Rio has good long-term prospects, but we're inclined to agree.

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.

Half Year Results

Iron Ore revenue fell 23% to $16.6bn, largely driven by a drop in average realised price from $168.4 to $120.5 per tonne. Labour shortages and increased rainfall meant Pilbara shipments lagged production, and fell 2%. Underlying cash profit (EBITDA) fell 35% to £10.4bn, largely due to the lower price but also impacted by higher costs at the Pilbara mine, which rose 22%.

Aluminium revenue rose 31% to $7.8bn, as the price increased 45%. That more than offset higher cost and contributed to a 49% increase in underlying cash profit, to $2.9bn.

Despite an 8% increase in the price of Copper, revenue fell 6% to $3.6bn. Mined production improved but production issues at the Kennecott smelter meant refined copper production fell 7%. That, plus lower sales, fed into a less efficient operation causing cash profit to drop 27% to $1.5bn.

In Minerals, sales grew 4% to $3.4bn benefitting from strong market conditions for titanium dioxide pigment, borates and diamonds, which more than offset a fall in pellets and concentrate sales from the Iron Ore Company of Canada . Underlying cash profit of $1.3bn was 10% lower than last year, due to higher cash costs, energy price increases and lower volumes.

Despite free cash flow of $7.1bn, net cash fell $1.3bn to $0.3bn at the end of the period. This reflected $7.6bn deployed for shareholder returns and the $0.8bn Rincon acquisition.

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: 27th July 2022