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Rio books 2pc profit boost amid miners' coal retreat

Glenn Freeman with AAP  |  01 Mar 2019Text size  Decrease  Increase  |  
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A shift away from coal mining by the majors was a key feature of fiscal 2018 and is reflected in Rio Tinto’s 2 per cent jump in full-year earnings.

Rio Tinto (ASX: RIO) on Wednesday reported US$18.1 billion ($25.5 billion) in underlying earnings before interest, tax, depreciation and amortisation, in line with Morningstar's expectations, says senior equity analyst Mat Hodge.

This underlying EBITDA result – up 2 per cent on last year – was also in line with the expectations of both Macquarie.

Reported earnings were 12 per cent higher year-on-year at US$13.6 billion, largely due to a series of divestments of coalmining operations.

Flush with commodity price rally proceeds

Rio made US$8.6 billion in divestments during the year, including the US$3.5 billion sale of its Indonesian aluminium mine, Grasberg, which completed in December.

These asset sales, along with strong operational cashflow of US$ 11.8 billion, underpin Rio's plan to return some $13.5 billion to shareholders – in the form of dividends, special dividends and a $4.2 billion share buyback.

Hodge said environmental, social and governance had been a key theme this earnings season, highlighted by Glencore’s announcement last week that it was moving away from coal.

"We've obviously seen Glencore reducing its coal operations, and now Rio is out of it altogether, and BHP is somewhere there in the middle," Hodge says.

Vale's dam disaster

In addition to reducing coal output, Rio and its competitors have also flagged increased emphasis on improving their processes for disposing of mining waste. This follows the deadly collapse of a dam operated by Vale SA in Brazil, which forced the world's top iron ore miner to cut production.

The disaster has intensified scrutiny of safety standards throughout the industry, in particular tailings facilities. Rio has some 100 tailings facilities across 32 sites.

Investors have zeroed in on the $13.5 billion Rio's management has pledged to return to investors – courtesy of a robust balance sheet driven by higher commodity prices.

These returns take the form of a $1.80 a share dividend, roughly in line with Hodge's expectations; a US$ 4 billion, or US$2.43 a share, special dividend; and a $3 billion share buyback.

"We hadn't factored it in, I guess it was a surprise that others didn't do it, but it's interesting to see Rio have been the one to do this," Hodge says.

The strong cash reserves Rio has built up also allowed an increase in capital expenditure during the year.

"Capex is starting to ramp up, but not massively and not at the levels we saw around five years ago, and a lot of it is replacement capex," says Hodge.

This replacement capital will be used in various projects, including the Koodaideri and Robe River mine developments.

Some market watchers have seized on the high commodity prices as a potential catalyst for increased merger and acquisition activity among Australian miners.

Rio chief executive Jean-Sebastien Jacques hinted at this during an analysts briefing.
Rio has "a watching brief, but we have a very high threshold in relation to [mergers and acquisitions],” he said.

"Are we looking at opportunities? The answer is yes, but we are not going to rush into M&A ... it has to really create value for shareholders."

Morningstar's Hodge says we have seen this among gold miners in recent times but not so much among the big coal and iron ore miners.

US gold miner Barrick's announced a merger with Newmont Mining earlier this month. Newmont had earlier announced a US$10 billion acquisition of another miner, Goldcorp.

Hodge doesn't read too much into Jacques comments: "I think it'd be a big departure for them. They all keep a constant watching brief, so these comments are nothing out of the ordinary."

Rio's share price topped 97 cents on midday Thursday following the result, settling back to $95.66 at the open today, 1.7-times higher than Morningstar's fair value estimate of $55, as set in January.

. Glenn Freeman is senior editor, Morningstar Australia.

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