The Rio Tinto Limited (ASX: RIO) share price hit a record high on its bumper profit and record dividend but some are questioning if this is as good as it gets for our largest iron ore miner.
The Rio Tinto share price jumped 2.6% to $135.67 in morning trade. In comparison, the S&P/ASX 200 Index (Index:^AXJO) added 0.4%.
Hopes that Rio Tinto’s peers will follow its lead in delivering super dividends is driving the sector higher. The BHP Group Ltd (ASX: BHP) share price gained 1.9% to $53.48 and the Fortescue Metals Group Limited (ASX: FMG) share price added 1.4% to $26.17 at the time of writing.
The many records broken by Rio Tinto
ASX miners are a group that have it all. They have stellar profits and the dividend crown jewels to match.
Rio Tinto is the first to show its wares. It produced a record US$12.2 billion first half underlying profit and broke another record with a US$5.61 per share dividend.
But there are cracks appearing just under its breathtaking consensus-beating results, reported the Australian Financial Review.
Not all good news for the Rio Tinto share price
For one, its main profit engine (being its iron ore division) is sputtering. If not for the gravity-defying iron ore price that is hovering over US$200 a tonne, the Rio Tinto share price would probably be in a nosedive.
The miner looks to be struggling to hit its calendar 2021 full year guidance of 325 million to 340 million tonnes. Shipments in the June quarter fell 12%, according to the AFR.
You can blame bad weather, labour shortages and COVID-19 lockdowns, but that still leaves a slight sour aftertaste.
Other potential risks to the record high Rio Tinto share price
Costs inflation is shaping up to be a problem too. That’s in part linked to the lack of workers but higher fuel prices and other operating expenses are putting a squeeze on profits. This issue won’t be confined to just the Rio Tinto share price, of course.
Further, Rio Tinto doesn’t seem to have good control over its mine plans. The AFR noted that the miner shocked the market in 2019 by vaguely referring to planning issues at its Brockman Hub in the Pilbara. These issues don’t seem to have been fully addressed as yet.
And who can forget the disastrous Juukan Gorge debacle that claimed the scalp of its former chief executive, Jean-Sébastien Jacques.
The clock is also ticking on how long Rio Tinto and friends can keep counting on China to buy everything they can dig up. China is determined to wean itself off Aussie products and is developing a mega mine in West Africa. Experts reckon the mine could start producing in a few years.
Needing a new viable growth strategy
In the meantime, the jury’s still out on Rio Tinto’s diversification strategy. Aluminium has yet to hit its straps, while the miner’s ambitious Oyu Tolgoi copper mine is plagued by issues.
Rio Tinto is trying aggressively to expand into lithium to ride on the electric car revolution. But questions remain, especially when BHP warned that the lithium market is too small and competitive to make a sufficient return.
That’s the problem with being an industry gorilla. Teasing out new growth avenues is so much more of a challenge.