Rio Tinto's (ASX: RIO) half-year report has given investors an insight into the current conditions in the resources sector and it doesn't paint a pretty picture.
When compared to the first half FY12, Rio's earnings fell across all business units except its struggling aluminium division. The company realised a 14% loss in underlying earnings of iron ore but remains Rio's number-one driver of revenue and profit.
Key financials
Analysts were predicting much of Rio's results, forecasting an 18% drop in underlying earnings. The reduced earnings figure was a result of lower average market prices and a higher tax rate but was offset by cost initiatives, record iron ore shipments, exchange rates and cost savings.
- Underlying earnings dropped 18% to $US4,229 million
- Net earnings dropped 71% to $US1,720 million
- Cash flows from operations increased 1% to $US8,005 million
- Capex dropped 9% to $US6,929 million
- Underlying EPS (US cents) dropped 71%
- DPS (US cents) increased 15%
- Debt raised to $US22.1 billion, up from $US19.2 billion at December 31
The lower realised price across all commodities returned decreased underlying earnings by $1,284 million whereas exchange rate fluctuations credited the company only $211 million. The Bingham Canyon mine collapse cost $340 million.
Outlook
CEO Sam Walsh said "The global economic volatility only serves to highlight the need to build a stronger and more resilient business". However he also noted that the medium-term outlook remains volatile and China is unlikely to rebound in the second half of the year but said it would not experience a hard landing.
The company's debt woes continued to amass as Mr Walsh's cost cutting agenda failed to achieve its target of $2 billion but surpassed Deutsche Bank predictions and managed to trim away $1.5 billion of non-core assets. According to Mr Walsh this has put the company "on the path toward becoming a leaner, more tightly-run business."
Rio's Pilbara expansion remains on budget and will commence shipping next month but Mr Walsh echoed that the company's flagship Oyu Tolgoi copper and gold mine will delay work and funding until the Mongolian government and Rio have completed discussions successfully.
Asset sales are also looking tough. The company said its attempted sale of its Pacific Aluminium business was a failure and it will be reintegrated into the Rio Alcan group.
Foolish takeaway
Iron ore prices are falling and despite Mr Walsh's acknowledgement that long term Chinese demand will remain, surplus supply will take its toll on prices and earnings. Investors may be wise to keep Rio on the watchlist and leave the rest for traders.
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More reading
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
