Rio Tinto Ltd (ASX: RIO) is one of the world’s largest metals and mining company. Rio Tinto produces iron ore, aluminum, copper, diamonds, titanium and borates. Rio Tinto has 60 operations and projects around the world and around 37,000 suppliers. Rio Tinto has a market capitalisation of A$35.4 billion.
What are the key features of Rio Tinto report?
Net cash generated from operating activities for FY19 is US$14,912 million, up 26% on FY18. Underlying earnings for FY19 is US$10,373 million, up 18% on FY18, while net earnings for FY19 is US$8,010 million, down 41% on FY18. Underlying earnings per share for FY19 is US636.3 cents, up 24% on FY18. Total dividend per share for FY19 is US443.0 cents (including a US60 cents special dividend), down 19% on FY18. The fall in total dividends in FY19 is because of the high special dividend paid in FY18. The FY19 dividend represents 70% of underlying earnings. The FY19 total dividend is a little lower than expected given Rio Tinto’s strong balance sheet.
What are the drivers of this result?
The key driver of net cash generated increasing by 26% is due to the strong iron ore price throughout the 2019 calendar year. Rio Tinto’s revenue from Iron Ore business increased by 29% compared with FY18. This is due to the 37% increase in the average realised price of iron ore compared with FY18, partly offset by a 3% fall in production of iron ore. On the other hand, revenue from Aluminum business is down 15%, due to a 14% reduction in the average aluminum price compared with FY18. Revenue from Copper and Diamonds business was also down 10%. This was attributed to a lower average price of copper and lower production levels of diamonds. Revenue from the Energy and Minerals business is down is down 6%. Production of iron ore pellets (Canada), titanium dioxide and borates increased while production of uranium fell.
What is the outlook for Rio Tinto?
Rio Tinto management provided production guidance for FY20. In general, it is expected that production in the Iron Ore and Aluminum businesses will be broadly flat, while production in the Copper and Diamond business is expected to fall. The flat outlook for iron ore production is a little below market expectations. For the Minerals and Energy business, production of titanium dioxide and borates is expected to be flat. This means that changes in commodity prices will drive Rio Tinto’s FY20 earnings rather than changes in production.
In terms of commodity prices, the key question now for investors is will the iron ore price remain strong moving into 2020. The Brazilian iron ore producer Vale is expecting iron ore production in 2020 to reach pre tailing dam collapse levels. This could increase total supply of iron ore in the global market reducing the price. Another point of concern for Australian iron ore producers is the coronavirus outbreak in China. The outbreak could weaken Chinese economic growth and demand for iron ore to produce steel. Investors should closely monitor these supply and demand issues for iron ore moving into 2020, and the effect they may cause on Australian iron ore producers such as Rio Tinto. Over the medium to long term, it can be expected that the iron ore price will fall from current levels of around US$90 per tonne to around US$50 per tonne.
What is the market reaction?
Rio Tinto share price was down 1.8% and is currently trading at A$91.89 (26 February 2020). However, this may not reflect Rio Tinto’s performance as Australian markets were heavily down. Rio Tinto has a forward P/E ratio in the low-teens and an annual dividend yield of around 5.6% (fully franked).
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