Rio Tinto Achieves Record Underlying Earnings and Dividends

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Rio Tinto Achieves Record Underlying Earnings and Dividends

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  • Record underlying earnings of US$12.2 billion for the first half-year, up 156 percent
  • Interim dividend of US$5.61 (A$7.6 fully franked)
  • Cash flow from operations of US$13.6 billion, an increase of 143 percent
  • Iron ore prices up 100 percent, copper up 66 percent and aluminium up 41 percent, compared to the 2020 first half-year
  • US$2.4 billion committed to the Jadar lithium project in Serbia, production scheduled to commence in 2026

Rio Tinto Limited (‘RIO’ or the ‘Company’) is the world’s second largest metals and mining corporation (after BHP). The Company’s product groups are iron ore, copper & diamonds, aluminium, gold and uranium. Iron ore currently accounts for approximately 76 percent of RIO’s EBITDA.

Financial results for 6 months to 30 June 2021

RIO achieved record underlying earnings of US$12.2 billion for the first half-year, up 156 percent from US$4.8 billion, in the previous corresponding 6 months. The strong profit outcome was driven by high iron ore prices, on the back of rising demand from China and supply constraints in Brazil. RIO also experienced higher aluminium and copper prices in the half-year. This profit result is equivalent to underlying earnings per share of US$7.52. This is also a 156 percent increase on the 2020 comparable result of US$2.94 per share.

Robust cash flow from operations of US$13.6 billion was recorded, an increase of 143 percent, compared to the 2020 first half year. Cap-ex of US$3.3 billion was funded from cash flow, leaving free cash flow of US$10.3 billion. This free cash flow enabled a US$3.8 billion reduction in net debt to a net cash position of US$3.1 billion at 30 June 2021. This compares to net debt of US$0.07 billion at the commencement of the year.

An interim dividend of US$5.61 (A$7.6 fully franked), payable 23 September, has been declared. The interim dividend comprises an ordinary dividend of US$3.76 and a special dividend of US$1.85 per share, representing 75 percent of underlying earnings, in total. The special dividend represents a ‘supplementary’ dividend to the ordinary divided and reflects the cyclical nature of the mining industry, which can experience periods of strong earnings and cash flow generation, driven by a spike in commodity prices. The RIO board have stated that over the long-term, it expects total cash returns to shareholders to be in the range of 40 to 60 percent of underlying earnings through the cycle.

The Future

RIO has committed US$2.4 billion to the Jadar lithium project in Serbia, one of the world’s largest greenfield lithium projects. The project is targeting first saleable production in 2026 and ramp-up to full annual production of 58,000 tonnes battery grade lithium carbonate, in 2029. Jadar has an estimated 40 year mine-life. This is a strategic investment into the fast-growing battery materials market. Strong demand fundamentals for lithium forecast demand to grow at 25 to 35 percent per year, over the coming decade.

However, in the interim, the question for shareholders is whether these elevated commodity prices, especially iron ore, are sustainable. Average monthly prices for iron ore have more than doubled compared to the 2020 first half-year and LME prices for copper and aluminium are up 66 percent and 41 percent respectively, for the same period. Commodity prices are highly cyclical, driven by global supply and demand and are highly sensitive to movements in exchange rates. The run-up in commodity prices has supported record earnings for RIO. Investors must weigh up the strong financial position and world-class mineral assets of RIO, against the sustainability of commodity prices at current elevated levels.

 

Caroline Wong

Caroline Wong is a Research Analyst at KOSEC – Kodari Securities. She writes on markets and focuses on ASX Top 300 companies. Email Caroline at c.wong@kosec.com.au.

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