Rio's Cascade Of Cash From Its 2017 Outperformance
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So much for all the hype about the resources boom from 2011 to 2014. The current boomlet is producing super returns for some companies, as the 2017 full year results for Rio Tinto confirmed yesterday.
Rio yesterday revealed the biggest dividend in its history, slashed debt and said it will top up its share buyback program by $US1 billion as profits rose on the back of higher commodity prices and cost cutting drive.
Rio declared a final dividend of $US1.80 a share, taking its payout for 2017 to $US2.90 a share, topping the previous high of $US2.15 a share in 2015, as the company set about slashing costs thanks to a sustained downturn in commodity prices, led by iron ore, copper and other metals, and oil and gas.
Of course iron ore was the main driver of an 70% increase in annual profits. But earnings also rose at Rio’s aluminium division which has struggled for years to gain traction. Profit margins were the highest in a decade, according to the company.
Rio reported underlying net profit after tax of $US8.62 billion, up from $US5.1 billion in 2016 as prices for all of its major commodities rose.
Rio CEO Jean-Sébastien Jacques said the results reflected “resilient prices during the year” coupled with a robust operational performance.
“Our strong balance sheet, world-class assets and disciplined allocation of capital puts us in the unique position of being able to invest in high-value growth through the cycle, and consistently deliver superior cash returns to shareholders,” he said in a statement.
Accelerating global growth and supply constraints has driven commodity prices to their highest level in more than three years, boosting the profitability and cash positions of the world’s biggest mining companies, as BHP’s half year results later this month will confirm (along with soon to report Glencore, Anglo American and Vale).
Analysts said Rio’s underlying result was a touch better than the $US8.5 billion forecast.
Rio said it would add a further $US1 billion to its buyback in its UK listed shares.
In total Rio has declared almost $US10 billion of cash returns to shareholders for the 2017 financial year, thanks to those rising profits (and commodity prices), lower costs (especially in iron ore) and the sale of an Australian coal business to a Chinese buyer and Glencore.
Net debt fell to $US3.84 billion from $US9.5 billion a year earlier.
Investors chased Rio shares on the ASX yesterday ahead of the release of its results, with the stock rising $2.88, or almost 4%, to close at $78.31. The ASX 200 also climbed, but by a much lower 0.75% (It had been up well over 1.1% in early trading).
In August 2017 Rio reported an underlying profit of $US3.95 billion for the first half of the year.
Rio could return more cash if it sells its remaining coal assets and an aluminium smelter in Iceland and its stake in Grasberg, the world’s second biggest copper miner (which could happen in the next month or so.
But with net debtless than $US4 billion, analysts are looking for the company to use its financial firepower to make a bug buy in copper.
Looking to 2018, it seems Rio is looking at another bumper year.
In its updated guidance it said it was expecting additional cumulative free cash flow of $US5.0 billion from 2017 to the end of 2021 from mine to market productivity improvements including $US300 million in 2018, net of $US300 million of extra costs.
Capital expenditure is expected to remain at around $US5.5 billion in 2018 and around $US6.0 billion in each of 2019 and 2020. Each year includes approximately $US2.0 to $US2.5 billion of sustaining capex, Rio said.
The company’s effective tax rate on underlying earnings of approximately 30% expected in 2018 and “production guidance is unchanged from the Fourth Quarter Operations Review."
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.