A sharply higher profit than forecast, a higher dividend, promise of more to come, and another hint that the company will soon be in a position to consider capital returns to shareholders – they are the brief highlights from Rio Tinto’s (RIO) interim profit announcement yesterday.
The world’s second biggest iron ore miner yesterday revealed that it lifted underlying earnings 21% to $5.1 billion.
A series of impairments and losses cut net earnings to $US4.4 billion for the June half year.
But that was still more than double the $US1.7 billion earned in the first half of 2013 which was cut by $US2.5 billion in write downs of exchange losses and impairments.
The latest half year period didn’t contain any huge losses – unlike the $US1.8 billion in exchange losses a year earlier.
The latest impairments included $US800 million of further impairments related to the Kitimat diamond project, non-cash exchange rate gains of $US600 million and other excluded charges of half a billion dollars.
At the same time the company said it had exceeded its promise of $US3 billion of sustainable cost cuts made in 2012, and had its eyes on a further $US1 billion over the next year and a half.
“This solid foundation for growth will result in materially increased cash returns to shareholders,” according to Rio CEO, Sam Walsh. “This is where we are coming from. We have put a lot of good work in place to increase the optionally the board has on this.”
And the company’s Chief Financial Officer, Chris Lynch, Rio’s agreed, saying in a briefing that, with net debt falling $US1.9 billion in the six-month period to $US16.1 billion, there was scope for the board to have some “fairly good news” for investors early next year, when the miner reports its annual results, which was the message earlier this year at the 2013 annual meetings.
RIO vs BHP 1Y – Rio cuts costs, eyes capital returns
In commentary accompanying the report, Rio Tinto was upbeat about the outlook for the global economy (although worried about the EU economy and tensions in the region), and expressed confidence about the outlook for the Chinese economy for the rest of the year (the company and Australia’s biggest market).
"Overall, we remain confident of the long-term fundamentals of demand, whilst recognising the changing nature of China’s economic development," the company said.
"In China, we still expect annual growth to end up near the official forecast of 7.5 per cent due to targeted expansionary policies."
In yesterday’s statement, Mr Walsh said, "Our outstanding half year performance reflects the quality of our world-class assets, our programme of operational excellence and our ability to drive performance during a period of weaker prices.
"These results show that our current strategic and management focus is making a meaningful contribution to cash flow generation.
"During the first half we have increased underlying earnings by 21 per cent to $5.1 billion and enhanced operating cash flow by eight per cent. We delivered what we said we would, exceeding our $3 billion operating cash cost reduction target six months ahead of schedule while producing record volumes and driving productivity improvements across all our businesses.
"We have decreased net debt by $US6.0 billion compared with this time last year, through our stronger operating cash flows, sharply reduced capital spend and proceeds from divestments. We are confident Rio Tinto’s low cost, diversified portfolio will continue to generate strong and sustainable cash flows over the coming years.
"This solid foundation for growth will result in materially increased cash returns to shareholders, underscoring our commitment to deliver greater value," he said in again raising the hopes of shareholders that the company will be ready to make a capital return around the timing of the full year profit report next February.
As a result interim dividend was boosted 15% to 96 USc a share, or 103.9 cents Australian.
Rio said it has managed to achieve more cost cuts than promised back in 2012. It said yesterday that it had racked up $US3.2 billion of "sustainable operating cash cost improvements since 2012, exceeding the 3 billion reduction target six months ahead of schedule.
"Momentum in cost reductions is now expected to realise a further $1 billion of savings by the end of 2015," the company said.
As reported last month in the latest production report, Rio shipped record iron ore volumes (especially from its huge WA mines), set production records for iron ore and thermal coal and delivered a strong operational performance in copper.
The company’s net iron-ore profit rose 10% to $US4.7 billion (and over $US8 billion before tax, depreciation, interest and amortisation) in the first half compared with $US4.27 billion a year earlier, as a sharp rise in output more than offset a 30% fall in prices of the steelmaking material from January to June 30.
Last month, Rio Tinto said it produced a record 139.5 million tonnes of iron ore after. Exports jumped 23% in the half year to 142 million tonnes.
Among other commodities, Rio Tinto’s aluminium division showed signs of a turnaround as earnings rose 74% from a year earlier to $US373 million.
The company said it increased cash flows from operations by 8% to US$8.7 billion, and cut capital expenditure to $US3.6 billion in the first half. "2014 capex is now expected to be around $9 billion, $2 billion below previous guidance, and around $8 billion each year from 2015," the company promised in yesterday’s statement
Net debt was cut by $US1.9 billion in the first half to $US16.1 billion at June 20, down from $US22.1 billion at 30 June 2013.
As forecast by some analysts, the company’s struggling aluminium division achieved earnings before interest, tax, depreciation and amortisation of $US1.1 billion, up 26% on the weak 2013 first half, weaker metal prices.
For the first time Rio revealed its average production cost for its huge Pilbara iron ore mines – $US20.40 a tonne, excluding royalties and freight. Its average realised iron ore price in the quarter was $US99 a wet tonne.
That’s significantly lower than the costs for Fortescue, Arrium and other smaller miners. Will BHP follow suit and release its figures next week in its full year results?
Mr Walsh said, "Our outstanding half year performance reflects the quality of our world-class assets, our programme of operational excellence and our ability to drive performance during a period of weaker prices. These results show that our current strategic and management focus is making a meaningful contribution to cash flow generation.
"During the first half we have increased underlying earnings by 21 per cent to $5.1 billion and enhanced operating cash flow by eight per cent.
"We delivered what we said we would, exceeding our $3 billion operating cash cost reduction target six months ahead of schedule while producing record volumes and driving productivity improvements across all our businesses.
"We have decreased net debt by $6.0 billion compared with this time last year, through our stronger operating cash flows, sharply reduced capital spend and proceeds from divestments.
"We are confident Rio Tinto’s low cost, diversified portfolio will continue to generate strong and sustainable cash flows over the coming years. This solid foundation for growth will result in materially increased cash returns to shareholders, underscoring our commitment to deliver greater value."
The report was issued just after trading finished in Australia yesterday afternoon.
The shares closed up 0.7% at $66.32, and depending on what happens overnight around the world, should start the day on a positive note Friday.
