ii view: Rio declares a $1 billion special dividend

Miner Rio Tinto will pay a $1 billion special dividend, underpinned by iron ore.  

Half-year results

• Revenue up 4% to $20.7 billion  
• Adjusted profit (EBITDA) up 11% to £10.3 billion
• Dividend payment up 19% to $1.51 
• Special dividend payment of 61 US cents

Chief Executive Jean-Sébastien Jacques said:

"We have delivered strong financial results with EBITDA margin of 47%. Our financial performance was driven by our Pilbara operations with a 72% EBITDA margin, underpinned by strong iron ore prices. We are taking actions to protect the Pilbara Blend and optimise performance across our iron ore system, following the operational challenges which emerged in the first half. Our world-class portfolio and strong balance sheet serve us well in all market conditions.”

ii round-up:

Mining giant Rio Tinto (LSE:RIO) has a history dating back over 140 years. Today it has a workforce of over 45,000 people spread across more than 30 countries. 

Its biggest product by far in revenue terms is iron ore generating nearly half of its sales. Aluminium comes in second at nearly 30%, with other metals such as copper and gold also within its portfolio. 

It has strong presences on the ground in both Australia and North America. 

A mid-July operational update saw difficulties being reported. A delay and cost overrun for its Oyu Tolgoi Mongolian copper mine proved disappointing. It came on the back of previously reported Australian iron ore operational challenges. 

However, first-half results proved to be its best since 2014, driven by the gain in the iron ore price. Profits for iron ore jumped by 33% to $7.6 billion, underpinning a surprise $1 billion special dividend. 

On the downside, it decided to swallow a large write-down on the value of its Mongolian copper mine. 

The share price was down over 2% in afternoon UK stock market trading. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties, the weather, not to mention trying to second guess the price direction of the commodity being extracted, can all impact financial performance. 

For Rio specifically, a diverse portfolio of mined commodities adds to its attractions. Reported operational difficulties are never welcomed, but the rise in the iron ore price to a five-year high is. 

For investors, a prospective dividend yield of around 8%, not guaranteed, is difficult to overlook. Combined with a forward price earnings ratio (PE) of under 10 and below the ten-year average of nearer 11 the appeal is enhanced. But a 20% plus upturn in the share price since the start of the year and exposure to a cooling Chinese economy, do we believe, provide for some counterbalance. 

Positive

• Iron ore prices hit record highs following concerns for shrinking stocks and worries re another mine dam collapse, as in Brazil
• Exposure to a diverse portfolio of commodities including copper and coal
• A prospective dividend yield of around 8%, not guaranteed

Negative

• Operational setbacks have been suffered
• China’s industrial output growth hit a 17-year low in May – a key market for Rio
• Currency movements can weigh on performance

The average rating of stock market analysts:

Hold