06-08-2015, 11:52 PM
Rio Tinto profit beats forecasts, paving way for acquisitions
THE AUSTRALIAN AUGUST 07, 2015 12:00AM
Matt Chambers
Resources Reporter
Melbourne
Rio Tinto has beaten first-half earnings expectations by cutting spending and costs, strengthening the miner’s ability to return cash to shareholders and helping prepare it to acquire a list of assets if they come to market.
The Anglo-Australian miner yesterday said underlying net profit slumped 43 per cent to $US2.92 billion ($3.98bn) as falling iron ore, coal, copper and aluminium prices took their toll. But this was a lot better than market expectations of $US2.4bn because analysts had underestimated the extent of savings and capital spending reductions.
“It’s a business that is humming,” chief executive Sam Walsh told The Australian, noting that in the past two years $US5.5bn had been cut from annual costs (beating a $US5bn target) and that there had been nearly $US3bn of working capital reductions in the same period.
The savings were evident in Rio’s net cashflow from operating activities for the first half, which fell only 19 per cent to $US4.4bn as cost and spending cuts combined with volume increases to offset a $US3.6bn hit to earnings from price falls.
The first-half profit was released after the market closed yesterday but the London stockmarket sent Rio shares marginally higher in early trade, with the result helping Rio avoid early 2-3 per falls in miners BHP Billiton, Glencore and Anglo-American.
Rio’s net profit fell 82 per cent to $US806m, largely because of the $US1.3bn effect of currency moves on debt and derivatives.
Chief financial officer Chris Lynch said the company’s focus on cash made the balance sheet robust, meaning that on top of returning cash to shareholders, Rio could look at acquisition opportunities if they came up.
“There are some assets that we’d like,” Mr Lynch said.
“Whether they come free, or on to the market, or whether we can shake them lose at some stage, that all takes time.”
He would not say expand on Rio’s asset wishlist but analysts believe copper is a likely contender, given the company has been bullish on the price outlook for the commodity.
“We’re interested in good assets that might currently be in distressed balance sheets — that type of thing,” Mr Lynch said.
“But there’s not a lot of those and when you go to the good asset side of things you have to expect a fairly competitive process.”
BT Investment Management’s Brenton Saunders said the result was a bit better than expected, with the aluminium and copper/coal units performing well.
But he said it was unclear how sustainable of the cost and spending cutting was and noted favourable currency moves had played a big part.
“I still can’t help but get the impression that for both BHP and Rio the capex is being reverse-engineered from where they need the cashflow to be to support the dividend and/or buyback,” he said.
“If there are good things to be spending money on, you should be spending money on them, and you almost get the impression that is a secondary consideration.”
Rio’s capital spending was $US2.47bn in the first half, down 36 per cent, leading to full-year guidance being reduced to $US5.5bn from previous forecasts of “less than $US7bn”.
Capital expenditure is tipped to be less than $US6bn next year and return to $US7bn in 2017.
Growth projects being factored in to this number include the South of Embley bauxite project on Cape York Peninsula, the Oyu Tolgoi copper and gold mine underground expansion and more West Australian iron ore spending to sustain production rates of 360 million tonnes per year.
On the cost side, Rio said it had made $US641m of cost savings in the first half, leading it to increase its full-year target from $US750m to $US1bn.
Rio declared an interim dividend of $US1.075 a share, up 12 per cent from a year earlier and fully franked for shareholders of Rio’s Australian-listed shares. Mr Walsh said that in Australian dollars, the interim dividend (which Rio has a policy of making half the previous year’s full dividend) would be boosted about 41 per cent because of the fall in the currency.
Citi analyst Clarke Wilkins said the result was in line with his estimates, but beat consensus estimates and should result in the market increasing expectations of a $US4.32bn full-year profit.
“We expect low double-digit per cent upgrades to the 2015 consensus earnings given the beat relative to the consensus underlying earnings and increased cost savings target,” Mr Wilkins said.
“Reduced capex is likely to translate into higher free cash.”
Additional reporting: Barry FitzGerald
THE AUSTRALIAN AUGUST 07, 2015 12:00AM
Matt Chambers
Resources Reporter
Melbourne
Rio Tinto has beaten first-half earnings expectations by cutting spending and costs, strengthening the miner’s ability to return cash to shareholders and helping prepare it to acquire a list of assets if they come to market.
The Anglo-Australian miner yesterday said underlying net profit slumped 43 per cent to $US2.92 billion ($3.98bn) as falling iron ore, coal, copper and aluminium prices took their toll. But this was a lot better than market expectations of $US2.4bn because analysts had underestimated the extent of savings and capital spending reductions.
“It’s a business that is humming,” chief executive Sam Walsh told The Australian, noting that in the past two years $US5.5bn had been cut from annual costs (beating a $US5bn target) and that there had been nearly $US3bn of working capital reductions in the same period.
The savings were evident in Rio’s net cashflow from operating activities for the first half, which fell only 19 per cent to $US4.4bn as cost and spending cuts combined with volume increases to offset a $US3.6bn hit to earnings from price falls.
The first-half profit was released after the market closed yesterday but the London stockmarket sent Rio shares marginally higher in early trade, with the result helping Rio avoid early 2-3 per falls in miners BHP Billiton, Glencore and Anglo-American.
Rio’s net profit fell 82 per cent to $US806m, largely because of the $US1.3bn effect of currency moves on debt and derivatives.
Chief financial officer Chris Lynch said the company’s focus on cash made the balance sheet robust, meaning that on top of returning cash to shareholders, Rio could look at acquisition opportunities if they came up.
“There are some assets that we’d like,” Mr Lynch said.
“Whether they come free, or on to the market, or whether we can shake them lose at some stage, that all takes time.”
He would not say expand on Rio’s asset wishlist but analysts believe copper is a likely contender, given the company has been bullish on the price outlook for the commodity.
“We’re interested in good assets that might currently be in distressed balance sheets — that type of thing,” Mr Lynch said.
“But there’s not a lot of those and when you go to the good asset side of things you have to expect a fairly competitive process.”
BT Investment Management’s Brenton Saunders said the result was a bit better than expected, with the aluminium and copper/coal units performing well.
But he said it was unclear how sustainable of the cost and spending cutting was and noted favourable currency moves had played a big part.
“I still can’t help but get the impression that for both BHP and Rio the capex is being reverse-engineered from where they need the cashflow to be to support the dividend and/or buyback,” he said.
“If there are good things to be spending money on, you should be spending money on them, and you almost get the impression that is a secondary consideration.”
Rio’s capital spending was $US2.47bn in the first half, down 36 per cent, leading to full-year guidance being reduced to $US5.5bn from previous forecasts of “less than $US7bn”.
Capital expenditure is tipped to be less than $US6bn next year and return to $US7bn in 2017.
Growth projects being factored in to this number include the South of Embley bauxite project on Cape York Peninsula, the Oyu Tolgoi copper and gold mine underground expansion and more West Australian iron ore spending to sustain production rates of 360 million tonnes per year.
On the cost side, Rio said it had made $US641m of cost savings in the first half, leading it to increase its full-year target from $US750m to $US1bn.
Rio declared an interim dividend of $US1.075 a share, up 12 per cent from a year earlier and fully franked for shareholders of Rio’s Australian-listed shares. Mr Walsh said that in Australian dollars, the interim dividend (which Rio has a policy of making half the previous year’s full dividend) would be boosted about 41 per cent because of the fall in the currency.
Citi analyst Clarke Wilkins said the result was in line with his estimates, but beat consensus estimates and should result in the market increasing expectations of a $US4.32bn full-year profit.
“We expect low double-digit per cent upgrades to the 2015 consensus earnings given the beat relative to the consensus underlying earnings and increased cost savings target,” Mr Wilkins said.
“Reduced capex is likely to translate into higher free cash.”
Additional reporting: Barry FitzGerald