Rio Tinto plc (RIO) Ordinary 10p
HL comment (28 July 2021)
Rio Tinto reported half year revenues of $33.1bn, up 71% year-on-year. Management attributed higher commodities prices, which drove the increase, to government stimulus and supply constraints. Profit after tax rose 271% to $12.3bn, with underlying earnings per share up 156% to 751.9 US cents.
The group will pay a dividend of 561 US cents per share, or 404.1p, equal to 75% of underlying profits.
The shares were broadly flat following the announcement.
Rio might technically be a diversified miner, but iron ore is really what it's all about - accounting for well over three quarters of profits last year. That's worked pretty well for the group - with strong Chinese demand, government stimulus and supply constraints causing a significant spike in the iron ore price and ultimately boosting profits.
With production costs at the flagship Pilbara iron ore mines expected to be around $18.50 a tonne, Rio has the potential to produce at incredibly low costs, though they are rising. Average market prices were $168 a tonne during the last half. Digging up some dirt and selling it for nine times what it costs is an attractive proposition by anyone's standards, and would still be if the price came off the boil a little.
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.
That legacy cost cutting has served the group well in 2020 - as prices recovered. Free cash flow is up strongly and, together with some caution on shareholder returns last year, that's seen net debt disappear for the moment. Bumper dividends will eat up some of that surplus cash but the balance sheet remains in pretty good shape, although any future payments will still depend on future profits.
That's just as well because we're at something of a turning point for the sector.
On the one hand demand for industrial commodities, like iron ore and copper, rises and falls with the economic cycle. We saw that in action over the first half of 2020, as the outbreak and subsequent government restrictions hit demand and prices dropped. China's push to get building again quickly meant the dent to Iron Ore was short-lived. But should the global recovery from the virus start to stagnate, commodities could take a turn for the worse once again.
You may also have heard speculation that we're at the start of a new inflationary "supercycle" for commodities. Lower interest rates and high levels of government spending should both stimulate economic activity and increase demand for commodities. Meanwhile years of financial restraint post 2015/16 mean miners haven't necessarily spent as much as they might have on new mines. That combination of increased demand and lower investment in new supply has proved explosive for commodity prices, and excellent news for miner's profits. However, there's no guarantee prices will stay high.
Ultimately, it's difficult if not impossible to say with any degree of certainty which direction commodities will take. However, we certainly see an argument for miners being on track for better times ahead. The good news is Rio's balance sheet gives it the firepower to invest in growth in a rising commodity price environment, but also the resilience to weather a downturn. Since Rio aims to pay out around half of earnings as a dividend every year commodity prices will be crucial for shareholder returns
Rio Tinto key facts
- Price/Earnings ratio: 6.6
- 10 year average Price/Earnings ratio: 10.5
- Prospective dividend yield (next 12 months): 11.4%
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.
Full Year Results
Rio's Iron Ore business saw sales rise 89% to $21.7bn - driven by a 97% rise in average prices per tonne, and despite a 3% fall in shipped volumes. Pilbara cash costs per tonne rose from $14.50 per tonne last year to $17.90, reflecting a $0.50 impact from Covid-19 and $2.40 from a stronger Aussie dollar. Underlying profits rose 124% to $10.2bn and free cash flow rose 114% to $9.1bn.
Aluminium sales rose 32% to $5.9bn, reflecting a 42% increase in average sales prices and relatively stable volumes. Underlying profits rose 377% to $921m and free cash flow rose 41% to $880m.
The Copper division saw sales rise 91% to $3.8bn, thanks to a 66% increase in prices and a 50% increase in refined copper production volumes. Underlying profits for the division rose 697% to $885m and free cash flow rose from negative $776m to positive $561m.
Minerals saw sales rise 41% to $3.3bn, with underlying profits rising 162% to $498m.Free cash flow rose 50% to $362m. With some exceptions, management said the division was "generally stable from an operational perspective".
Group wide free cash flow rose 262% to $10.2bn and capital expenditure rose 24% to $3.3bn. After a $3.8bn improvement, Rio Tinto has a net cash position of $3.1bn.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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