Shares in global miner Rio Tinto were sold off yesterday in the wake of the interim result as brokers reckoned the record dividend, buyback (with more to come) wasn’t enough.
The shares had fallen in London and New York trading on Wednesday night on the feeling the 12% rise in earnings was under forecast (by the brokers) and the $UD1.27 a share was also light on.
The stock price fall also follows declines in iron ore and other declines in iron ore and other base metal prices overnight amid concerns demand will be hit by renewed US-China trade tensions. The iron ore price fell 2.4% after Donald Trump said he would boost tariffs on more Chinese imports. In Australia, Rio shares were down 3% in early trading and went on to end the day off 4.9% at $77.65.
BHP’s big rally ended on the fall in iron ore prices and gloom about the sector (from the poor broker reaction to the Rio figures).
BHP shares fell 3.3% to $33.92.
While the broker reaction was more a result of them overestimating the Rio figures. But there were several hints of weakness – profits from the iron ore operations slowed with the gross margin down a little, free cash flow feel and debt rose 36% (but with the promise that it will remain around current levels).
Rio’s financial heart is the world’s best mining assets – the Pilbara iron ore mines (of it, BHP and Fortescue Metals).
These mines turn red dust into riches and despite decades of a scare campaign against unions, investors, governments and anyone else who threatened to grab a share of these ‘gold’ mines, they have remained in Rio’s hands and have gotten more productive and more profitable over the years as Chinese demand has exploded.
In the six months to June, Rio generated revenue of $US9.120 billion from these mines and reported earnings before interest, tax, depreciation and amortisation (EBITDA – the most accurate measure of an assets profitability) of $US5.656 billion or a profit margin of 62%.
That compares to the first half of 2017 when revenue amounted to $US8.763 billion and EBITDA of $5.607 billion, or a margin of 63.9%.
Those returns are better than Apple’s.
It is investing around $US5.5 billion and $US6 billion in 2019 which are substantial amounts.
Debt rose 36% to $US5.23 billion where the company plans to keep it – it will pay tax of around $US2.2 billion for the half year and around $US1.2 billion on the sale of its Queensland coal mines (these are on top of royalty payments).
Rio is immensely profitable, cash rich and doesn’t need a transfer from taxpayers to its shareholders and management that the corporate tax cuts.