Morningstar | Special Dividend the Highlight of Rio Tinto’s 2019 Result, Benefiting from High Commodity Prices
Dividends dominated Rio Tinto’s 2018 result. The company paid a USD 2.43 per share special dividend with the proceeds from its earlier asset sales. Most of this was from the exit of coal with Rio Tinto now completely out. The final dividend USD 1.80 per share brought the full year pay out to USD 5.50 including the special dividend. The financial position is very strong. Rio had USD 0.3 billion net cash at the end of 2018. On an adjusted basis, net debt is USD 8.0 billion after including the upcoming dividend and tax payments and the remaining share buyback.Adjusted net profit after tax USD 8.8 billion was slightly ahead of 2017’s USD 8.6 billion result. Underlying EBITDA declined from USD 17.4 billion to USD 17.2 billion, excluding the earnings from the discontinued coal operations. Productivity gains via volumes and cost efficiencies were generally offset by inflation. Rio Tinto aims to gain further productivity benefits of USD 0.6 billion in 2019, though we expect a large portion of the benefits to be offset by slowly rising industry inflation. Rio Tinto’s peers are also engaging on similar productivity based initiatives.
We retain our AUD 55 per share fair value estimate for Rio Tinto and the shares remain overvalued. Commodity prices, particularly for steel making materials, are elevated. Our expectation that China is unlikely to continue to support excessive investment activity through ever-increasing debt is the key reason for overvaluation. Lower fixed asset investment in China is likely to have an outsize impact on demand for steel and iron ore. Iron ore accounts for about two-thirds of Rio Tinto’s earnings. Lower fixed asset investment should also slow demand growth for copper and aluminium, which make up most of the company’s non-iron ore earnings.
The 3% lower iron ore price was the primary driver of the 2% decline in iron ore EBITDA to USD 11.3 billion. Aluminium EBITDA declined 10% to USD 3.1 billion with higher costs more than offsetting the benefit of higher prices. Higher copper production was the primary driver of a 46% increase in EBITDA for copper and diamonds.
Rio Tinto is engaged in finding, mining and processing mineral resources. Co. has four product groups: iron ore, which supplies the global seaborne iron ore trade; aluminium, which includes bauxite mines, alumina refineries, and aluminium smelters; Copper and Diamonds, which has managed operations in Australia, Canada, Mongolia and the U.S., and non-managed operations in Chile and Indonesia, with by-product including gold, silver, molybdenum and others such as sulphuric acid, rhenium, and lead carbonate; and Energy and Minerals, which comprises mining, refining and marketing operations across borates, coal, iron ore concentrate and pellets, salt, titanium dioxide and uranium sectors.
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