Rio Tinto's underlying cash profits slip as prices dip

It might seem disingenuous to suggest that Rio Tinto (RIO) is moving through an expansionary phase given its £89bn market capitalisation. But its half-year figures show that the mining group is intent on redefining its asset portfolio, a point borne out by its recent move into the North American aluminium recycling industry or by progress at its Simandou iron ore project in Guinea. That’s to say nothing of the Oyu Tolgoi underground mine in Mongolia, a development which has had its problems in terms of delays and cost overruns, but one which will vastly expand Rio’s copper production at a time when many mining analysts are pointing to a looming structural deficit in global supply.  

The group might have been busy reshaping future revenues flows, but the market wasn’t overly impressed by its half-year figures, which detailed a slump in underlying earnings and a sizeable dividend cut from the prior half year. None of this would have surprised analysts given the direction of iron ore pricing and the slower-than-expected economic rebound in China, although Rio notes that weaker demand from western markets has dragged on financial performance.

Rio derives around 70 per cent of its revenues from iron ore production and conditions in the market have been mixed. Average prices from its Pilbara operations fell by 11 per cent year on year to $98.60 (£78.56) per wet metric tonne, which offset a 7 per cent increase in shipments. Softening price effects are also reflected in the one-third drop in net cash from operating activities to $6.98bn.

Overall, movements in commodity prices resulted in a $3.3bn decline in underlying cash profits. Profitability was held in check by production input costs for materials such as caustic, coke and pitch, leading to significant margin compression at the group’s aluminium business, which also had to contend with a 25 per cent drop in realised prices. Price pressures here have started to ease, but the benefits will not be apparent until the secon-half figures are published.

Rio Tinto chief executive Jakob Stausholm said that management is “mindful” of the need to “raise [Rio’s] game” across many of its other operations beyond the core Pilbara site. To this end, the group reveals that in 2024 and 2025, its share of capital investment is expected to be up to $10bn per year, including up to $3bn in growth per year, “depending on opportunities”. A rating of 10 times forecast earnings isn’t extravagant given the dividend yield on offer, but the capital demands are placing pressure on free cash flow yields. Hold.

Last IC View: Hold, 6,061p, 22 Feb 2023