Rio Tinto posts first ever annual loss - UPDATE

14th Feb 2013 07:17

Mining heavyweight Rio Tinto swung into its first ever full-year loss in 2012, dragged down by impairments against its aluminium and Mozambique coal assets. The world's second largest iron ore producer posted a $2.9bn net loss, a 151% drop from the $5.8bn net profits reported the year before. Losses reflected writedowns on its Alcan takeover in 2007 and a coal acquisition in Mozambique, where transport challenges have slowed development and coal output estimates have been cut.Capital expenditure rose 42% to $17.4bn, compared to $12.3bn the previous year, as the group was negatively affected by higher energy and maintenance costs.The group was also hit by iron ore prices, which averaged 27% lower during the last half of 2012 than a year earlier at about $116 a ton, according to data from The Steel Index. Prices have since recovered, reaching a 15-month high of $158.50 a ton last month on signs of economic recovery in China, the largest consumer of industrial metals.Sam Walsh, who was appointed Chief Executive last month, vowed to slash costs and spend more carefully on shareholder value following the results. Rio is targeting more than $5.0bn of cumulative cash cost savings over the next two years, he said.Walsh took over from Tom Albanese, who was fired for misjudged aluminum and coal acquisitions that led to $14.4bn in writedowns and left the company in the red."Today I am setting out how we can build on our strengths and improve this great company," he said in a statement alongside the financial results. "Under my leadership, Rio Tinto will have an unrelenting focus on pursuing greater value for shareholders."To do this we need to run the business as owners not managers and my immediate priority is to build more focus, discipline and accountability throughout the organisation. Demonstrating this commitment, we will deliver our capital reduction and cost savings targets and improve performance across our business."Underlying earnings for the year fell 40% to $9.3bn from $15.5bn in 2011, while underlying earnings per share tumbled 38% to $5.03 from $8.08. It missed forecasts by analysts at JP Morgan, who expected the group to report underlying earnings of $48.9bn.Cash flows from operations were also down by 40% to $16.4bn, a big dip from $427.3bn. Nevertheless, the company's dividend rose 15% to $1.67 per share from $1.45, beating market estimates of $1.525 as management gave a positive outlook for the future of the business. Net debt increased from $8.5bn to $19.3bn as operating cash inflows were offset by capital expenditure, acquisitions, the increase in dividend and share buy-back programme.The group's aluminium and energy business faced a deterioration in market conditions and rising costs, while Rio generated strong margins in copper, iron ore and minerals. "Throughout 2013 and 2014 we will seek to enhance margins at our existing businesses by unlocking substantial productivity improvements, aggressively reducing costs and better managing our sustaining capital," Walsh said. Chairman Jan du Plessis said the "quality of our assets combined with our positive long term outlook" provided confidence in the sustainable cash-generating potential of the business. "Today's increase of 15% in our full year dividend reflects that confidence," Plessis added.Shares fell 1.09% to 3716.00p at 11:36 Thursday.Brokers reactIn spite of the annual loss, Nomura remained upbeat about the results, reiterating its 'buy' rating and 3,700p target price for the stock."A first look at results shows a small beat versus Nomura and consensus, looking past the headline numbers, which include the asset impairments that have already been well publicised," the broker said.The analyst said three of Rio's smaller divisions, Diamonds/Minerals, Energy and Aluminium, were behind the better-than-expected results. The iron ore unit, which accounts for around 80% of earnings, delivered in-line results.It labelled Rio as an attractive and relatively low-risk exposure to the mining sector in a "volatile and unpredictable" macroeconomic environment.Canaccord, however, said volume guidance for iron ore and copper was a little below its current production estimates for 2013 and may lead to some estimate revisions. Other analysts concur.Rio Tinto expects to produce approximately 265m tonnes from its global operations in Australia and Canada, subject to weather constraints.Canaccord said if iron ore prices persist at the current level then the management team would have an estimated $1.8bn cash surplus building by year end versus an essentially cash neutral base case for 2013. "This could see pressure rising for a return to shareholders," it said.The broker also issued a 'buy' rating and price target of 4,200p.Uncertainty in MongoliaThe chief executive has voiced his concern about tensions between the company and the Mongolian government over the Oyu Tolgoi copper mine. The government is asking Rio Tinto to revise the current shareholders agreement in relation to the project. Once opened it will be the largest contributor to the land-locked nation's economy. The commercial start-up of operations at this project - provisionally slated for June/July - had been identified by analysts as the next major catalyst for the shares.