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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

Investors favouring Rio over BHP
THE AUSTRALIAN AUGUST 07, 2015 12:07PM

Barry FitzGerald

Resources Editor
Melbourne

​Rio Tinto’s better-than-expected June half profit has it outperforming its rival for the investor’s dollar in the resources space, BHP Billiton.

Shares in Rio (RIO) were trading 0.5 per cent higher at $53.78 (11.45am) while BHP (BHP) resumed its recent share price weakness, trading 1.76 per cent lower at $26.21.

Last night Rio comfortably exceeded consensus for a $US2.4 billion profit by posting a $US2.9bn result. The out performance has the chunk of analysts that had their estimates around the consensus figure busily upgrading their full year expectations, underpinning today’s share performance.

The market was also taking comfort from comments from chief executive Sam Walsh that the iron ore market could be moving from oversupply to a state of equilibrium. Rio is the world’s lowest-cost producer of the steelmaking raw material and its earnings are heavily exposed to its price gyrations.

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MOREWalsh a dab hand at riding downturn
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Mr Walsh said Rio expected that higher-cost producers around the globe — but mainly in China — would shut in as much as 120m tonnes of annual capacity this year. It also estimated that 45m tonnes remained at a risk.

Either way, the capacity drops will offset the 110m tonnes of additional capacity that Rio and other producers will bring to the market in 2016.

Analysts at Citi said that while the profit was higher than consensus, it was in line with its estimates.

“We expect double-digit percentage upgrades to the 2015 consensus earnings a share (estimates) given the relative beat to consensus at the underlying earnings level and the increase to the cost savings target by $250m,” Citi said.

“Reduced cash capital expenditure is likely to translate in to higher free cash,” Citi said.

Because of the sharp fall in the dollar, the 12 per cent increase in the group’s US dollar interim dividend translates in to a 40 per cent bump up in local currency.

The dividend was increased from US96c to $US1.075 despite the profit pressure.

Iron ore: Rio Tinto launches Pilbara costs assault

• THE AUSTRALIAN
  
• SEPTEMBER 26, 2015 12:00AM
  

Matt Chambers
[Image: matthew_chambers.png]
Resources Reporter
Melbourne

[Image: 354528-a3fdd4e6-6367-11e5-ae2c-91350e74fa5b.jpg]
Rio Tinto is battling BHP for the mantle of lowest-cost iron ore producer Source: News Limited
[b]At the remote Cape Lambert iron ore port in the Pilbara in Western Australia, which effectively inspired BHP Billiton’s failed 2007 bid for Rio Tinto, things are quieter than they have been of late.[/b]
A construction workforce that spent the last two years building Rio a second iron ore jetty and associated port and rail infrastructure at a cost of more than $US10 billion ($14bn) has now finished, and Rio’s mine system has not been expanded to match the infrastructure capacity.
But it is here, 40km northeast of the industrial town of Karratha in the nation’s northwest that Rio’s group-wide assault on costs can be stepped up over the next couple of years as it battles BHP for the mantle of the world’s lowest cost iron ore producer.
There is not only the potential to reduce costs simply through increasing mine production to match the infrastructure capacity. There should be the opportunity to find new efficiencies and for Rio produce at a higher rate than the infrastructure capacity of 360 million tonnes a year to serve global iron ore demand that Rio expects to keep growing.
Rio iron ore chief Andrew Harding, who runs the nation’s biggest mining business, says the completion of the expansion means the chance to accelerate cost-cutting that has already driven costs (before shipping, royalty payments and sustaining capital) down to $US15.20 a tonne, from $US20.40 a year ago, helped by a falling Australian dollar.
“With the port and rail infrastructure now complete, we can concentrate on improving system-wide efficiency and productivity, rather than managing the demands of both construction and operations,” Mr Harding said.
On top of this, Rio’s big boom-time push into driverless trucks and trains is expected to keep it ahead of BHP on the cost front.
“Our first-mover advantage with new technology is providing us with a productivity edge that we do not see being bridged by others in the foreseeable future,” Mr Harding said.
BHP’s unsuccessful $US160bn bid for Rio eight years ago, and a subsequent friendly iron merger between the two that was quashed by regulators, was largely driven by a wish to access Rio’s port expansion options at Cape Lambert, which does not have the constraints of BHP’s Port Hedland harbour to the north-east. The appeal for Rio in a tie-up would have been BHP’s mines, which are closer to the coast and generally regarded as longer-life, meaning it does not have to spend as much on sustaining capital as Rio.
Rio has completed a $US14.7bn mine and infrastructure expansion to boost its Pilbara region iron ore capacity from 290 million tonnes a year to 360 million, and will need to spend more to get mine capacity to match its port and rail capacity.
Next year it plans to produce 335 million tonnes (including minority partners’ share) and in 2017 it aims produce 350 million.
And it is not until this happens that Rio will be able to really tell what new efficiencies can be squeezed out of its expanded system of iron ore mines, railways and ports.
This will put Rio’s ports at a similar stage BHP’s was in last year when it finished its infrastructure capacity expansion to 245 million tonnes. It is now targeting going up to 290 million tonnes through productivity gains and opening up existing bottlenecks.
While the potential gains are unlikely to be as big as those BHP iron ore boss Jimmy Wilson has eked out of BHP’s space constrained Port Hedland infrastructure that has been built up over decades, Mr Harding wants Rio’s system to produce more than its nameplate capacity. “We have not tested the system at 360 (million tonnes),” Mr Harding told analysts earlier this month.
“Theory would say there would be more capacity available, history would say the same thing, but there’s no way on earth I’m going to volunteer anything in advance until we’ve actually done all that test work, but have no doubt that we will actually be doing it.”
The coming production from Rio, along with expansions from Vale, Hancock Prospecting and BHP, will put further pressure on an iron ore price that has fallen from $US135 a tonne at the start of last year to around $US50. But the way Rio and BHP see it, they will still make good margins as the world’s lowest-cost producers and other miners will have to shut their higher-cost operations to make way.
Earlier this month, UBS analysts declared BHP’s total costs (including shipping, royalties and sustaining capital) had fallen to $US28 a tonne, for the first time beating Rio, at $US30, to be the world’s lowest-cost iron ore exporter to China.
But with Rio’s coming mine expansion and potential de-bottlenecking, Mr Wilson’s aim of cementing BHP as the lowest-cost iron ore producer is far from achieved.
Mr Harding did not acknowledge the widely reported UBS claim when he fronted analysts two days later. “We are the lowest cost producer and intend to ­remain in this position through the hundreds of initiatives we are pursuing,” he said.
Deutsche Bank estimates Rio can cut costs before shipping, sustaining capital and royalties to $US11 a tonne or $US12 by 2017.
The reporter travelled to the Pilbara as a guest of the WA Chamber of Minerals and Energy

• SHANGHAI
   
  
  
•  Oct 16 2015 at 2:58 PM 
  

Rio Tinto to cut diamond production, focus on Chinese market

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[img=620x0]http://www.afr.com/content/dam/images/g/k/a/o/w/c/image.related.afrArticleLead.620x350.gkb14y.png/1444977641086.jpg[/img]Alan Davies is putting the brakes on Rio's diamond production. Mathias Magg
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by Lisa Murray
Rio Tinto will cut back its production of diamonds this year and focus on bringing more affordable jewellery to the Chinese market as ample supply and waning demand for the precious gemstones weigh on prices.
China, the world's second-largest diamond market, is an important one for Rio, which is looking to capitalise on the growth of "fashion jewellery" pieces that can be worn every day and cost between $300 to $1000. This suits Rio's Argyle mine in Western Australia, which produces smaller, more affordable diamonds.
Alan Davies, who heads up Rio's diamonds and minerals division, predicts the fashion jewellery segment will be "quite resilient" over the next nine months, buoyed by the rising incomes of China's middle-class, but he concedes the higher quality bridal category is "doing it tough".
Demand for diamonds and other luxury goods has been hit in China because of the slowing economy and as consumers eschew lavish displays of wealth amid a government crackdown on corruption and expensive gift-giving.

 "What we are seeing is a little bit of inventory build up in that bridal category and that's going to take some time to clear the market," Mr Davies said this week in Beijing.
He expects it will take up until the end of next year to "clear through" and in the meantime, said Rio is looking to cut costs.
The miner announced on Friday it would "pause final product processing in the fourth quarter at Argyle in light of current market conditions" and now expected to produce 18 million carats of diamonds this year, down from its previous estimate of 20 million.
'COMFORTABLE' TAKING OUT SOME COSTS




"We will look at what we can do to defer costs and bring product to the market at the right time to get the right value," Mr Davies said on Thursday ahead of the announcement. "While it's a touch oversupplied now, I'm comfortable to take some costs out."
Over the years, Rio has mulled whether to get out of the diamonds business, which is part of its smallest division. But it decided against a listing or sale in the absence of a good offer. Earlier this year it sold its 78 per cent stake in the Murowa diamond mine in Zimbabwe. On the other hand, last year it invested another $350 million in the the Diavik diamond mine in Canada.
"If a buyer were to turn up with a lot of cash that values it more than what we do, even looking through the cycle, there is no doubt that we would look at that on behalf of our shareholders. So we're not religious about it, but we do like the fundamentals of the diamond business," Mr Davies said.
"Revenues in the diamonds business have been about the $700 [million] to $1 billion range so it's a nice diversification on revenue."

Rio's iron ore business is tied to the fate of China's manufacturing and property sectors, which have slowed sharply over the past two years. However, the diamonds division is more aligned to Chinese consumption and there are some positive trends emerging, despite the struggling luxury sector.
Rio entered the Chinese diamond market five years ago, via a strategic partnership with prominent local jeweller Chow Tai Fook, which has over 2000 stores across China and south-east Asia. About 6 per cent of Rio's diamonds now go into China, which has a 13 per cent share of the global retail diamond jewellery market.
The company said sales of typical Argyle fashion jewellery pieces had grown to an expected $US135 million in 2015 from $US11 million in 2011.
As part of of a partnership with Chow Tai Fook, Rio's Argyle diamonds were being showcased at the premiere of The Australian Ballet's 2015 China Tour in Beijing this week.