Rio Tinto’s LON:RIO results last week were marginally weaker than consensus estimates, with earnings down over the year due to declines in its key commodities. Free cash flow remained strong, and the company provided updated guidance for 2023 in which it expects to come in at the bottom end of its previous $8.0bn to $9.0bn range, with $2.0bn assigned to growth in 2023 before increasing to $3.0bn in 2024. Rio Tinto is to pay a dividend of 492 cents per share, at the top end of its 40% to 60% payout policy.
“The results mark the end of a challenging year for the business as iron ore and copper prices declined,” said Andrew Duncan, a senior equity analyst with UK stock broker Killik & Co. “Over the medium to long term, we continue to like Rio Tinto for its world class asset base and disciplined approach to capital allocation, and believe the shares are attractively valued at 10.3x December 2023 earnings, offering a prospective dividend yield of 6.1%.”
Underlying earnings were $13.3bn, with underlying EPS of 819.6 cents. Underlying earnings were down 38% from 2021, reflecting the decline in commodity prices, the impact of higher energy and raw materials prices on the company’s operations, and higher rates of inflation on operating costs and closure liabilities. Underlying earnings compared with consensus estimates for $13.4bn.
In its own analysis of Rio Tinto’s balance sheet, Bridgewise rated Rio Tinto a 48/100, saying: “Rio Tinto’s recently published balance sheet conveys disappointing growth, particularly with respect to Cash & Equivalents and Equity metrics. Rio Tinto did a poor job related to managing cash and cash equivalents this period. The company’s cash and cash equivalents metrics highlight a difficult overall financial situation, which may, unfortunately, continue moving forward unless management makes significant changes.”
Rio Tinto continues to struggle against the peers average for mining names of this quality and calibre. Bridgewise noted that Rio Tinto still boasts comparatively strong income metrics and momentum versus mining peers. EBITDA still stands out as discouraging however.
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Underlying EBITDA was $26.3bn, down 30% from 2021, with an underlying EBITDA margin of 45%. Movements in commodity prices resulted in a $8.1bn decline in underlying EBITDA with weaker iron ore and copper prices partly offset by an uplift in the aluminium business. Higher sales volumes and changes in product mix across the portfolio increased underlying EBITDA by $606m compared to 2021. This was mainly attributable to increased iron ore sales from the ramp-up of Gudai-Darri along with higher portside sales in China, and favourable value-added product premiums for the aluminium business.
Net cash down 36%
Net cash generated from operating activities was $16.1bn, down 36%, and included items of a non-recurring nature which reduced operating cash flow by around $2bn. Free cash flow of $9.0bn included capital expenditures of $6.8bn, decreasing 9% as the company commissioned its current programme of Pilbara replacement projects.Rio Tinto’s net debt at year end was $4.2bn, compared with net cash of $1.6bn at the start of the year, primarily reflecting free cash flow of $9.0bn, offset by $11.7bn of cash returns to shareholders and $3.8bn for the acquisitions of Turquoise Hill Resources and Rincon Lithium Project.
The company announced a full-year dividend of $8bn, equivalent to 492 cents per share, and representing 60% of underlying earnings, in line with Rio’s shareholder returns policy.
In 2023, Rio Tinto said it expects capital investment to be around $8bn, including growth capital of around $2.0bn. In 2024, this will rise to $9bn to $10bn, including the ambition to invest up to $3bn in growth per year, dependent on opportunities. Production and unit cost guidance is unchanged from the company’s fourth quarter operations review in January.
