Rio Tinto Ltd (RIO)

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4 August 2020

Results 

Half Year 2020

Half Year 2019

Change

Gross Revenue (US$m)

20,333

21,809

-7%

Underlying profit (US$m)

4,750

4,932

-4%

Bloomberg Consensus (US$m)

4,300

 

 

Net profit (US$m)

3,316

4,130

-20%

Underlying EBITDA (US$m)

9,640

10,250

-6.8%

Iron Ore Average Price (US$/t)

85.4

85.3

steady

Ordinary Interim Dividend (US$)

1.55

1.51

+3%

Rio Tinto (RIO) profits fall but iron ore remains solid   

What happened?

  • Australia’s second largest miner, Rio Tinto (RIO) reported first half profit results slightly ahead of analyst expectations as surveyed by Bloomberg. Numbers were mostly weaker on the year before, due to COVID-19 disruptions. Revenue for the half fell 7% to US$20.3 billion while underlying profit slipped 4% to US$4.8 billion. However net profit, which includes one-off charges, dropped 20% to US$3.3 billion.
  • RIO will return US$2.5 billion to shareholders via its interim dividend of US$1.55 per share, up 3% from the same time last year. The payout ratio lifting slightly to 53% of underlying profit.

Why did it happen?

  • The sharp decline in net profit was primarily due to impairment charges of US$1 billion (increase of US$174 million from 1H19) in relation to four aluminium smelters and its Diavik diamond mine (Canada). Elsewhere, the 6.8% fall in underlying Earnings before Interest, Taxes, Depreciation & Amortisation (EBITDA) was a result of overall lower commodity prices over the half. Lower volumes and prices for aluminium, copper and diamonds also weighed on RIO’s revenue. Aluminium and copper prices saw the sharpest falls with the average aluminium price down 15% and average copper prices easing 11%. Aluminium has been hurt by softening global demand while Copper operations were hampered by a planned shutdown and an earthquake at its Kennecott site in Utah, US. Commodity price movements reduced US$604 million from its US$9.6 billion underlying EBITDA but a weaker Aussie dollar and lower energy prices were beneficial. 
  • While RIO does mine a number of commodities, iron ore is by far the largest and most profitable component of its business. Over the half, iron ore operations contributed US$7.7 billion or ~80% of the group’s underlying EBITDA and US$4.5 billion or ~90% of underlying profit. While the average realised iron ore price was steady on the prior year at US$85.40/tonne, increased production and shipments (on strong demand from China) together with lower operating costs helped lift earnings and revenue from the division. RIO also makes more than half of its total revenue from its iron ore business. Of its US$20.3 billion group revenue, iron ore contributed US$11.5 billion, which was an increase of 2%.
  • The average realised iron ore price Jumped 36.8% to US$85.90/dry metric tonne (dmt) as Chinese steel demand remained strong over 2019. RIO makes more than half of its total revenue from its iron ore business. Of its US$45.4 billion group revenue, iron ore contributed US$24.1 billion which was an increase of $29%. While prices were higher, shipment of the ore actually fell 3% to 327.4mt over the year while operating costs also rose 8% to US$14.4/dmt. This was due to disruptions due to weather and a fire at one of its ports.
  • RIO’s Energy & Minerals segment, which is the smallest contributor to group earnings, saw revenue deteriorate by 8% to US$2.3 billion while underlying EBITDA tumbled 23% to US$739 million.
  • RIO also spent $2.7 billion on capital expenditure which was 13% higher on first half 2019, despite the impact of COVID-19.

Where to now?

  •  While COVID-19 remains an uncertainty for most businesses in the near term, RIO has still kept guidance unchanged from its quarterly update in April this year.
  • RIO reconfirmed production guidance for 2020 with iron ore shipments expected to be 324-334mt and costs in the range of US$14-15/t. Aluminium production is expected between 3.1 to 3.3mt. Capital expenditure (capex) is likely to be US$6 billion in 2020 before increasing to US$7 billion each in 2021 and 2022.
  • Mined and refined copper guidance is subject to the effective ongoing restart of the Kennecott smelter.

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