ii view: Rio Tinto prepares for COVID-19 disruption

Shareholder returns remain attractive but prospects for 2020 are uncertain. 

Full-year results to 31 December 2019

• Revenue up 7% to $45.4 billion
• Adjusted profit (EBITDA) up 17% to $21.2 billion
• Ordinary full-year dividend payment up 24% to $3.82 per share 
• Total dividend payment for the year down 19% to $4.43 per share
• Net debt of $3.7 billion, up by $3.9 billion

Guidance:

• Evaluating the impact of the coronavirus which could create significant uncertainty near term
• Production expectation unchanged

Chief executive Jean-Sébastien Jacques said:

“We have again delivered strong financial results with underlying EBITDA of $21.2 billion, underlying EBITDA margin of 47% and return on capital employed of 24%.  

“In line with our disciplined approach to capital allocation, we invested $2.6 billion in development projects, including high-return iron ore and copper. Longer term, our $624 million exploration and evaluation expenditure in 2019 adds to our pipeline of attractive options. 

"Our world-class portfolio and strong balance sheet serve us well in all market conditions, and are particularly valuable in the current volatile environment. We are closely monitoring the impact of the Covid-19 virus and are prepared for some short-term impacts, such as supply-chain issues. Our products are currently reaching our customers. 

"Our resilience and value over volume strategy mean we can invest in our business and deliver superior returns to shareholders in the short, medium and long term."

ii round-up:

Diversified miner Rio Tinto (LSE:RIO) reported a healthy profit increase in these latest results, broadly matching city expectations, but warned on the potential impact of the coronavirus (COVID-19). 

Buoyed by previous Brazilian supply disruption and ongoing Chinese demand, the group’s iron business, its biggest commodity by sales, delivered a 40% plus gain in adjusted profits, fuelling a 17% improvement in overall profitability to $21.2 billion. 

Gains for the gold price also assisted, offset by price declines and subsequent earnings falls for both its aluminium and copper businesses. 

But along with accompanying management comments in relation to the coronavirus, returns to shareholders proved marginally shy of forecasts, a move interpreted as flagging management caution given the potential disruption which the virus may bring. 

The share price proved little changed in early afternoon UK trading, similar to rivals such as BHP Group (LSE:BHP) and Anglo American (LSE:AAL). 

Rio adjusted its climate change strategy to include a goal to reduction absolute emissions by 15% come 2030 from 2018 levels.

ii view:

Rio Tinto has a history dating back over 140 years. Today it has a workforce of over 45,000 people spread across more than 30 countries. It has strong presences on the ground in both Australia and North America. 

A diverse portfolio of mined commodities compares to the more focused product list sold by rival Antofagasta (LSE:ANTO) for example. It also compares well on an environment basis. It does not mine coal or extract oil and gas, and three-quarters of its electricity consumption at its managed operations is supplied by renewable energy.

For investors, a prospective dividend yield of around 6.5%, not guaranteed, is difficult to overlook. Combined with a forward price/earnings (PE) ratio of under 10, which is below the 10-year average of nearer 11, and the appeal is enhanced. But, given both the coronavirus and exposure to what was already a slowing Chinese economy, some caution is more than warranted. 

Positive

• Exposure to a diverse portfolio of commodities
• Attractive shareholder returns

Negative

• China’s growth rate has hit a 29-year low – a key market for Rio
• Subject to matters outside of management’s control such as the weather

The average rating of stock market analysts:

Hold