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Rio Tinto's return of the cash (once again)

Though flush with cash, the mining giant is sticking with its cautious approach to capital expenditure
August 1, 2018

In the first half of 2018, the biggest factor outside Rio Tinto’s (RIO) control – commodity prices – moved in the miner’s favour. Though the index for Pilbara iron ore fines dropped 9 per cent, higher copper and aluminium spot prices meant that, underlying cash profits were up $604m (£460m), all else being equal.

IC TIP: Hold at 4,056p

Overheads – over which Rio has some control – rarely do stay equal, though a productivity programme is helping. The efficiency drive, which is part of a $5bn cumulative target by 2021, has apparently added $0.7bn since its launch in 2017, off-setting what chief executive Jean-Sébastien Jacques notes as a return to “inflationary pressures… across the industry”.

One area where Rio exerts complete control – capital expenditure – is rising, albeit gently. Exclude sustaining capital spend, and $1.4bn went to four sources: fresh exploration, the Amrun bauxite mine in Queensland, the underground development of Oyu Tolgoi, and a project to automate Rio’s train network in the Pilbara.

That helps explain the rise in net debt, though the half-year balance sheet would have nearly been cash neutral had $4bn of pre-tax disposal proceeds arrived a month earlier. A non-binding agreement to sell Grasberg should bring in another $3.5bn, though the mild uplift in 2020 capital expenditure plans from $6bn to $6.5bn points to further shareholder returns.

On average, analysts expect adjusted pre-tax profits of $12.7bn, and EPS of $4.97 this year, dropping to $10.7bn and $4.42 in 2019 on lower commodity price expectations.

RIO TINTO (RIO)   
ORD PRICE:4,056pMARKET VALUE:£72.1bn
TOUCH:4,055-4,056p12-MONTH HIGH:4,541pLOW: 3,256p
DIVIDEND YIELD:5.8%PE RATIO:10
NET ASSET VALUE:2,458¢*NET DEBT:11%
Half-year to 30 JunTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201719.34.96184110
201819.96.73252127
% change+3+36+37+15
Ex-div:09 Aug   
Payment:20 Sep   
£1=$1.31. *Includes UK and Australian listed shares.