Rio Tinto changing gears
Resource Hotspot 300
Rio Tinto has released its interim earnings results, reporting a robust headline figure of underlying earnings of US$5.8 billion – a record interim half performance and 125% above the same period in 2009.
Cash flow from operations was also very strong, up 78% from the 2009 first half to US$9.9 billion and was supplemented by US$3.6 billion of asset sales. As a consequence the company was able to reduce borrowings to a net debt position of $12.0 billion at 30 June 2010, from US$18.9 billion at 31 December 2009. This is rapidly moving towards the previously stated net debt target of US$10 billion.
The result was driven by a particularly strong performance from its iron operations – in terms of both production volumes and iron ore prices, with copper and aluminium also benefitting from price recovery, as illustrated below:
Source: Company
Source: Company
Significantly, the result probably represents a turning point for the company in the current economic cycle – and is likely to mark its transition from a phase of ‘rebuilding the balance sheet’ to one of ‘investing in growth’. In effect, it is flagging its faith in the long term China growth story, despite a recent pullback in its growth trajectory – noting that it believes future growth will be a sustainable 8-9% pa rather than unsustainable rates of 11% pa or greater that were recorded earlier in the decade.
In keeping with the ‘new’ growth bias, the company has announced some US$3 billion of project approvals during 2010 – including expansion of Pilbara iron ore, funding for Simandou, increased investment in Ivanhoe, Iron Ore Company of Canada expansion, construction of Eagle nickel/copper mine and the molybdenum autoclave project at Kennecott Utah Copper.
Commenting on the result, Chief Executive Tom Albanese noted:
“We achieved a first half record of $5.8 billion in underlying earnings following a strong recovery in our key markets. We have reaped the benefits of the cost reduction efforts implemented in 2009 and have been pushing our production hard to benefit from a strong pricing environment, leading to record first half cash flows from operations of $9.9 billion. Together with divestment proceeds, this enabled us to reduce our net debt to $12.0 billion at 30 June 2010.
Growth is the first priority for our cash flows: the relatively low levels of capital expenditure in the first half of $1.8 billion reflected the cash preservation efforts in 2009. We expect second half capital expenditure to rebound significantly: we have approved $3 billion in project development so far this year, including $1 billion towards the expansion of our Pilbara operations to 330 million tonnes per annum and $170 million to progress the Simandou iron ore project in Guinea. Earlier this year we committed new funds for iron ore expansion in Canada, a new nickel mine in the US and expanded molybdenum production at Kennecott Utah Copper. We also have scope for targeted investment in aluminium and alumina, and to develop the major Oyu Tolgoi copper / gold project in Mongolia.
In early July, the Australian government announced the proposed introduction of a Mineral Resource Rent Tax in 2012. We now have further opportunity to work constructively with the government to ensure that the tax system continues to encourage investment in Australia.
Last week we signed the joint venture agreement with Chalco for the development and operation of the Simandou project in Guinea. We continue to engage with the Guinean Government and to invest funds to keep this world-class iron ore project moving forward and we anticipate mining operations would start within five years.
We continue to progress the proposed Western Australian iron ore production joint venture with BHP Billiton, with a key focus on obtaining regulatory approval.
Global growth of nearly four per cent is predicted by the IMF for both this and next year, with Chinese GDP expected to grow at approximately nine per cent. This would have positive implications for metals and minerals markets but it is clear that economic conditions on a global scale will be volatile. Our longer term view remains that industrialisation and urbanisation in China, followed by India, will drive robust commodity demand growth.
Our strategic focus on large, long-life, low-cost assets – those that remain profitable through all parts of the economic cycle – will serve us well in an increasingly volatile world.”
