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Rio Tinto back in black with US$4.6bn profit

Anthony Fensom  |  09 Feb 2017Text size  Decrease  Increase  |  

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Cost cuts and improved commodity prices have helped mining giant Rio Tinto Limited (ASX: RIO) bounce back into the black after last year's losses.

The Anglo-Australian miner posted net earnings of US$4.6 billion (A$6 billion) for 2016, marking a US$5.5-billion turnaround after recording a US$866 million loss for the previous year.

"Most commodity prices increased for the first time in a number of years in the second half of 2016, despite numerous political and macro shocks to the global economy," the company said, noting a 6 per cent rise in the benchmark iron ore price along with higher coking and thermal coal prices.

However, the company suffered falls in aluminium and copper prices that resulted in an overall US$460-million decline in underlying earnings compared to 2015.

Underlying earnings increased by 12 per cent to US$5.1 billion, above consensus estimates of US$4.87 billion, helped by US$1.2 billion in cash cost improvements.

Net cash generated from operating activities dipped by 10 per cent to around US$8.5 billion, attributed to increased interest costs and movements in working capital, while consolidated sales revenues fell by US$1 billion to US$33.8 billion.

Rio Tinto strengthened its balance sheet by cutting net debt by 30 per cent to US$9.6 billion for a gearing ratio of 17 per cent, while generating free cash flow of US$5.8 billion, including the proceeds from asset sales.

The company announced an ordinary dividend for the full year of US$1.70, down 21 per cent on the previous year, with a final dividend of US$1.25 to be paid in April.

Morningstar senior equities analyst Mathew Hodge said Rio's the headline net profit was slightly weaker than his forecast due to net impairments, onerous contract, restructuring, closure and tax costs of US$1.4 billion, partly offset by balance sheet exchange gains and gains on business sales of US$0.9 billion.

"The dividend was a surprise ... With the strong finish to the year, and greatly reduced net debt, we thought Rio had the capacity to pay more, but the payout was at the top of guidance for a payout ratio of 40 per cent to 60 per cent and ahead of our full-year forecast for US$1.45 per share," Hodge said.

"We expect further dividend growth in 2017 with the higher near commodity prices, Rio Tinto's intent to pay more, and asset sales."

Rio also separately announced a US$500-million share buyback scheme of its Rio Tinto plc shares, to be completed by year-end, bringing total shareholder returns for 2016 to US$3.6 billion, or 70 per cent of underlying earnings.

Commenting on the result, Rio's chief executive J-S Jacques said: "Today's results show we have kept our commitment to maximise cash and productivity from our world-class assets, delivering US$3.6 billion in shareholder returns while maintaining a robust balance sheet."

"At the same time, we strengthened the portfolio and advanced our high-value growth projects as we look to the future".

Jacques said the miner entered 2017 in "good shape" and would deliver US$5 billion in extra free cash flow over the next five years from its ongoing productivity program, with a "value over volume approach".

Across its divisions, energy and minerals posted the biggest earnings growth, with underlying earnings before interest, tax, depreciation and amortisation (EBITDA) up 46 per cent to US$1.8 billion, while iron ore delivered an 11 per cent EBITDA gain to US$8.5 billion.

However, copper and diamonds dipped 24 per cent to US$1.38 billion, while aluminium fell by 10 per cent to US$2.47 billion.

Despite slashing capital expenditure (capex) by 36 per cent to around US$3 billion, the company pointed to its investments in three major growth projects in bauxite, copper and iron ore, comprising the Amrun bauxite project in Queensland, the Oyu Tolgoi copper mine in Mongolia, and the Silvergrass iron ore project in Western Australia.

Rio Tinto maintained guidance of operating cash cost improvements of US$2 billion over 2016 and 2017, with additional free cash flow of US$5 billion by the end of 2021 from productivity improvements.

It said capex would be around US$5 billion in 2017 and around US$5.5 billion in each of 2018 and 2019, with a gearing ratio of 20 to 30 per cent through the cycle. Production guidance was unchanged from its fourth quarter operations review.

Meanwhile, the company said it was cooperating with the relevant authorities concerning its Simandou project in Guinea and an investigation into Rio Tinto Coal Mozambique, with the outcome of such investigations "subject to a number of significant uncertainties".

Rio Tinto shares closed on Wednesday 0.8 per cent higher at $65.69 a share, prior to the earnings announcement.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

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