The Motley Fool

Here’s why Rio Tinto Limited is now a buy

At market close yesterday, Rio Tinto Limited (ASX: RIO) shareholders finally got the report they’ve been waiting for.

Despite significant falls in the iron ore price, an $800 million writedown and a loss from its Energy division, Rio more than doubled half-year net profits, when compared to the 2013 half year. Net profit came in at $4.4 billion whilst underlying earnings were an impressive $5.1 billion, up 21%.

Although some analysts had expected a slightly better profit result there are a number of important takeaways from yesterday’s announcement. Including:

  • A 15% increase in the interim dividend taking the payout to AUD103.09 cents per share
  • $1.9 billion in debt paid off. Meaning more than $6 billion has been paid off since 1H13
  • $3.2 billion in cost cuts since 2012
  • Capex of $US3.2 billion, down 48% from a year earlier
  • 8% increase in operational cash flow to $8.7 billion
  • $373 million profit from the aluminium division, up 74%
  • Iron ore earnings up 10% to $4.7 billion
  • Copper earnings up 71% to $594 million
  • Energy unit loss of $19 million, from a $52 million loss last year
  • Impairment charges of $843 million

Upon release of the results, CEO Sam Walsh said: “Our outstanding half year performance reflects the quality of our world-class assets, our programme of operational excellence and our ability to drive performance during a period of weaker prices.”

He continued to say: “During the first half we have increased underlying earnings by 21 per cent to $5.1 billion and enhanced operating cash flow by eight per cent… We delivered what we said we would, exceeding our $3 billion operating cash cost reduction target six months ahead of schedule while producing record volumes and driving productivity improvements across all our businesses… This solid foundation for growth will result in materially increased cash returns to shareholders, underscoring our commitment to deliver greater value.”

To buy, or not?

With increases in underlying EBITDA across all divisions except Energy (which was expected), today’s result will go a long way to improving investors’ sentiment towards Rio Tinto shares and those other ASX-listed miners in general. With Pilbara iron ore cash costs of $20.40 per tonne (excluding royalties and freight), increasing copper sales and a number of promising signs in Aluminium markets I believe Rio Tinto shares are firmly in the buy zone.

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Motley Fool Contributor Owen Raszkiewicz holds Rio Tinto $47 December 2017 Call warrants. 

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