Rio Tinto
Rio Tinto is a leading international mining group. The Group's major products include aluminium, copper, diamonds, energy products, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore.
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Rio first half profits fall 65pct, in-line with expectations
On the face of things a 65 pecent decline in first half profits from Rio Tinto might seem a tad disastrous, but bearing in mind that during H1 2008 key metals prices for the company - notably copper and aluminium - were at record levels, whereas for at least the first quarter of the current year they had fallen drastically, Rio's results are pretty much in line with those of other diversified miners.
With big improvements in the copper and aluminium prices towards the end of the past half year, results looking forward have to be much more positive barring a further commodities price slump later in the year.
Like its bigger diversified competitor, BHP Billiton, Rio has published underlying earnings figures as well as net earnings comparisons and these appear marginally better at a 54% fall.
As Rio points out, the effect of price movements on all major commodities in first half 2009 was to decrease earnings by $4.7 billion compared with first half 2008. Prices declined for nearly all of the company's major commodities; average copper and aluminium prices were 50% lower while average molybdenum prices were 74% lower than in the 2008 first half. Gold which is less significant for Rio was fairly consistent with the same period of 2008, but diamond prices were severely impacted by the global economic downturn.
Where Rio's figures differ from BHP's though (although it should be borne in mind that the latter was reporting a full year's results rather than just a half year) was that iron ore revenues fell back around 31% while BHP's were maintained. Aluminium revenues fell 45% turning a net profit of $1.04 billion into a loss of $689 million, and copper revenues fell back by a similar 45%.
Rio's biggest problem has been one of timing though, the purchase of Alcan, at close to the peak of market, saddled it with huge debts which it has had to try and reduce drastically at a time when the bottom has fallen out of the metals markets - and aluminium in particular. To an extent it has been successful in drastically lowering its net debts which have been reduced by $14.8 billion and while this still leaves the company heavily indebted the position is not nearly so precarious as it was only a few months ago.
There are other initiatives in progress which will reduce the debt burden further - notably the iron ore production joint venture with BHP Billiton and the sale of the aluminium packaging unit to Amcor.
On the Rio Tinto Alcan situation, chief executive Tom Albanese commented: "Rio Tinto Alcan was impacted by very tough trading conditions as a result of a dramatic decline in prices. We have acted aggressively to push costs down, including curtailing production at our higher cost operations. The benefits of these steps are starting to emerge but we expect the greatest effect to be felt in the second half of the year. High cost alumina has been curtailed and by the end of 2009 we expect approximately 12% of smelting capacity will have been idled, divested or shut down, representing 42% of our capacity in the top half of the cost curve. In addition, annual bauxite production at the Weipa mine has been cut by five million tonnes following a sharp fall in alumina and aluminium demand in recent months."
A turn around in this and the copper sectors would be the most significant for Rio and with some decent recovery seen in copper and aluminium prices in recent months this should already be happening.
What is apparent though is that although Rio's tribulations will have seemed disastrous to its shareholders at the depths of the recession late last year, the company has been successfully dealing with many of its major problems with its strength in depth as a diversified miner helping it pull through. The disposal of some non-core assets, closing unprofitable operations, sharply cutting its global workforce and paying strong attention to costs in all sectors is making it a much leaner and more efficient company. The problem with metals price booms for mining companies is that it is too easy to let efficiencies slide. While big downturns are very painful they do focus management attention on savings and efficiencies and Rio is likely to come out of the downturn in a very positive manner - particularly if commodity prices continue to improve and better things are seen in some still very depressed sectors like diamonds.
On dividends, the company is passing its interim dividend this year, but reckons it will make a 2009 final dividend payment subject to satisfactory trading results, progress on divestments and prevailing market conditions. Indeed chairman Jan du Plessis avers "We expect that the total cash dividend for the 2010 financial year will be at least equal to the total cash dividend payment for 2008 of $1.75 billion, albeit over an increased number of shares. From that point on, the Group is committed to the resumption of a progressive dividend policy over the longer term."
Iron ore is obviously of major importance moving forward along with copper and aluminium and the sooner the price contracts with Chinese steel mills are finalised the better. It is almost certainly the position taken by CISA (the Chinese steel industry association) and its chairman which has been the stumbling block. Maintaining ‘face' is of major importance in many far eastern cultures and CISA chairman Shan Shanghua went on record saying that CISA would not accept anything other than a lower price for Chinese mills than Rio had negotiated with its other Far Eastern customers. Rio has not been prepared to charge its Chinese customers less than the others, and BHP and Vale, the other major suppliers have followed Rio's lead. Only Fortescue has broken ranks with a small reduction, but this is tied to a Chinese financing deal.
Significantly reports have come in today that, given the problems with the current iron ore negotiations, which have seen spot iron ore prices rise to well above Rio's proposed benchmark pricing levels, CISA will not lead iron ore pricing negotiations next time around and China's negotiations leader will be Baosteel, the country's largest steel producer which returns the situation to what it was before CISA became involved.
The iron ore pricing fiasco, which has not worked well for the Chinese steel mills - and may have led indirectly to the arrest of the Rio Four on industrial espionage and bribery charges as well as souring China-Australia governmental relations - may thus be drawing to a close and may stabilise any ongoing problems Rio may have had with Chinese exports, although the company says it is currently producing record tonnages.
Like BHP Billiton, Rio remains cautious on commodity prices going forward in the short to medium term. "We remain cautious about the recent rally in prices. However, the expectation that development in emerging markets will generate underlying strength in metals and minerals demand over the long term remains broadly unchanged. Rio Tinto has a strong business with some of the best assets in the industry and we will continue to take the actions necessary to ensure we are well placed to deliver value for our shareholders whatever the timing of a recovery." says Rio chairman Jan du Plessis.
Overall, Rio's CEO, Albanese reckons that "Despite difficult markets, our businesses are running smoothly. We are on track to meet the commitments we made in December last year to reduce operating expenditure and the capital expenditure estimate has been revised in line with market conditions.
"We have continued to make good progress on asset divestments with $3.7 billion announced to date this year. All of these divestments were at fair values, given current market conditions, which demonstrate the quality of Rio Tinto's assets.
"Rio Tinto is taking the right steps to emerge from this challenging period as a stronger, fitter business. We will continue to focus rigorously on operational excellence, delivering reliable supply to our customers and value to our shareholders, while preserving future growth options. We look to the future with confidence."
Rio's results appear to have been well received by the markets. Some feel that its growth, or rather recovery, potential is better than that of BHP which perhaps fared rather better through the initial downturn. Should commodity prices remain at current levels, or improve further, Rio looks well placed and with strength in depth could probably even ride out a further downturn pretty well given its financials are in a much better position than they were only a few months ago.
Mineweb is a web-based international mining publication focusing on mining financial and corporate news and comment.
Other Rio Tinto news
- China accuses Rio of six-year "commercial espionage" program
2009-08-10 - Police detain Shougang executive in Rio espionage probe
2009-07-10 - Rio Tinto employees arrested amid reports of Chinese climbdown in iron-ore negociations
2009-07-08 - Rio BHP deal highlights strategic importance of seaborne iron ore
2009-06-10 - Rio Tinto calls off sale of borates business
2009-05-23
