MaxMarioni
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Posted on 12 February 2017, 8:57 PM

Rio Tinto Rebounds after Tackling Debt and Cutting Costs

Other Insights on Related Shares: RIO.L
Related Shares: Rio Tinto Share Price

What a difference a year makes for the critical evaluation of a stock's performance. Last year, Rio Tinto, the second biggest mining company in the world by market share, had reported a loss totalling US $866 million in its 2015 annual results. The stock nose-dived on the back of cutbacks on its dividend and concerns on its levels of debt. The Anglo-American mining giant seems to have really turned a corner now. In the words of the company's Chief Executive, J-S. Jacques: [Rio Tinto]'s results show we have kept our commitment to maximise cash and productivity from our world-class assets, delivering $3.6 billion in shareholder returns while maintaining a robust balance sheet. […] We enter 2017 in good shape.”

The company, reporting its annual earnings on 8th February, has managed to generate consolidated sales revenues of $33.8 billion: however, this was $1 billion lower than 2015, primarily due to lower average commodity prices, and lower market premia for aluminium.

Underlying earnings were, on the other hand, $5.1 billion, which is $0.6 billion higher than last year, with cash cost improvements of $1.2 billion, more than offsetting the $0.5 billion (post-tax) impact of lower commodity prices. This pushed-up underlying earnings per share (EPS) to 283.8 US cents, compared with 248.8 US cents at the same stage last year.

The better underlying profit results were the product of the painful savings exercise the company's management board embarked upon last year. Rio Tinto managed to generate $1.6 billion of pre-tax sustainable operating cash cost improvements - the difference between the current and prior year full cash cost of sales per unit based on the prior year volume sold – and strengthened the balance sheet further with net debt reduced to $9.6 billion. The operating cash flow has been improved too, and now it stands at $8.5 billion. Rio Tinto is on track to achieve $2bn in cost savings by the end of next year, while planning to increase cash flow by $5bn before 2021.

But Rio Tinto's new course is not just characterised by financial prudence: the Anglo-American miner is investing in three signature mining projects in bauxite, copper and iron ore, diversifying its portfolio of products on offer. The markets are clearly excited about Rio Tinto again, after its stock performance last year showed it lagging behind stocks of fellow miners, Glencore PLC (LON:GLEN) (LSE:GLEN.L), Anglo American plc (LON:AAL) (LSE:AAL.L), Antofagasta plc (LON:ANTO) (LSE:ANTO.L) and BHP Billiton plc (LON:BLT) (LSE:BLT.L). On the wings of strong market expectations for the company in 2017, predicting earnings per share to rise by 40%, the share closed the week with a +5% sign. Its one year return rate is 104.05%, while its year to date return is 13.11%. With a P/E ratio of 17.36, the share seems reasonably cheap when compared with its historic value.

 

 

 

 


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