• Company Description - Rio Tinto Limited (Rio Tinto) is a mining company. The Company is focused on finding, mining and processing the Earth's mineral resources. The Company's products include iron ore, aluminum, copper, diamonds, coal, uranium, gold and industrial minerals, such as borates, titanium dioxide and salt. The Aluminum product group includes bauxite, alumina and aluminum. Copper product group comprises four assets and two development projects. The group includes copper, gold, silver and molybdenum. Diamonds & Minerals product group comprises a suite of businesses, which include mining, refining and marketing operations across four sectors. Energy product group produces coal and uranium. Iron Ore product group operates iron ores. The Company's iron ore mines are located in Australia and Canada. Its products are sold in Japan, China and South Korea.

• Ongoing impact of commodity prices volatility on performance: Rio Tinto Limited (ASX: RIO) reported a revenue decline of $6.4 billion to $17.98 billion during the first half of 2015, from $24.3 billion in the first half of 2014 as commodity prices led to $7.1 billion decrease.   Accordingly, the EBITDA margin fell to 38%, as compared to 41% in pcp. But underlying earnings fell even more to $2.9 billion, which is a decrease of $2.2 billion in first half of 2015 against the $5.1 billion in first half of 2014. On the other hand, RIO’s efforts of improving costs coupled with decrease in energy costs and positive currency movements had reduced over 40% of the $3.6 billion (post-tax) impact of lower prices. Net earnings plunged 82% yoy to $0.8 billion in the first half of 2015, impacted by the non-cash exchange rate and derivative losses of $1.3 billion as well as impairment charges of $0.4 billion associated with the Energy Resources of Australia, legacy remediation costs of $0.2 billion and general restructuring and headcount reduction costs of $0.1 billion. Basic earnings per share fell 82% yoy to 43.8 cents during the period from 238.2 cents in pcp. 

• Balance sheet highlights:  Rio Tinto’s net cash from operating activities decreased by 19% yoy to $4.4 billion in the first half of 2015 as commodity prices impact offset the decrease in taxes paid and a steady working capital during the period. On the other hand the group improved its working capital to $30 million during the period, against the $0.8 billion outflow in the pcp. RIO also cut its capital expenditure by $1.4 billion to $2.5 billion as its major projects were finished last year. However, RIO’s net debt rose by 10% yoy to $13.7 billion in 1H15, from $12.5 billion in pcp, leading to a net gearing of 21% during the period against 19% in pcp. RIO estimates to maintain a gearing ratio in the range of 20 to 30% for fiscal year of 2015. The group delivered over $3.2 billion to shareholders during the first half of 2015. The group spent $1.0 billion of share buy-backs, with $0.4 billion off-market in Rio Tinto Limited and $0.6 billion on-market as a part of its sharebuy back program. RIO improved its interim dividend per share by 12% yoy despite earnings pressure to 107.5 cents during the period.

• Commodities pricing pressure on earnings:  The volatility in prices for major commodities led to a decline in underlying earnings by $3,620 million during the first half of 2015, against pcp. The average Platts price for 62% iron Pilbara fines decreased by 46% on average against 1H14. Hard coking coal benchmark prices and thermal coal spot prices declined by 14% and 17% respectively. The average copper and gold prices fell 14% and 7% respectively, but LME aluminum prices rose by 2%. Meanwhile, US dollar rose by 14 % on an average as compared to the Australian dollar, while improved 11% as compared to Canadian dollar and the South African rand during the first half of 2015. Subsequently, the currency improvements supported underlying earnings by $847 million during the period against pcp . Better iron ore Volumes boosted earnings by $79 million from pcp in 1H15.  But volumes fell in copper, mainly due to Rio Tinto Kennecott. On the other hand, lower input Energy prices enhanced underlying earnings by $163 million in 1H155 as compared with the first half of 2014, driven by lower oil prices which reduced to an average of $58 per barrel during the first half of 2015. The group realized $5.4 billion pre-tax ($3.8 billion post-tax) in total operating cash cost improvements and reductions in exploration and evaluation expenditure against its 2012 base. RIO achieved $0.6 billion pre-tax ($0.5 billion post tax) in operating cash cost savings and reductions in exploration and evaluation spend during the first half of 2015.

• Iron Ore Segment Performance: RIO’s Iron Ore underlying earnings plunged 55% yoy to $2,099 million during the first half of 2015, against $4,683 million in first half of 2014, impacted by falling prices. But, the group has been making efforts to reduce costs and accordingly achieved pre-tax cash cost improvements in the Iron Ore by $244 million during the period and generated over $954 million of savings against 2012. Pilbara cash unit costs decreased to $16.20 per tonne during the first half of 2015, as compared to $20.40 per tonne in pcp. But, Pilbara operations EBITDA margin declined to 61% during the first half of 2015, from 70% in pcp. Onn the other hand, Pilbara operations Gross sales revenues surged to $7,004 million (comprised freight revenue) during the first half of 2015, against $635 million in 1H14. The segment delivered a net cash from operating activities of $2,065 million driven by solid shipments from both the Pilbara and the Iron Ore Company of Canada, couple with less operating costs and enhanced productivity. Capital expenditure plunged 58% as 290 Mt/a mine expansions finished last year and RIO even finished Pilbara infrastructure expansion. Meanwhile, iron ore’s second quarter 2015 production increased by 9% as compared to second quarter 2014 and 7% higher than the first quarter of 2015.

• Guidance: The group forecasts its copper production to be in the range of 500 and 535 thousand tones, while the refined copper production is estimated to be in the range of 190 and 220 thousand tonnes. Thermal Coal production is projected to be in the range of 18 to 19 million tonnes of while  semi-soft coking coal is expected to be in the range of 3 to 3.4 million tonnes and hard coking coal is forecasted to be in 7.1 to 8.1 million tonnes. The group estimates its production to be 1.2 million tonnes of titanium dioxide slag, 0.5 million tonnes of boric oxide equivalent and 20 million carats of diamonds for 2015. The group’s uranium production is anticipated to reach over five million pounds. RIO improved its Operating cash cost (including exploration and evaluation savings) for 2015 full year to $1.0 billion from $750 million. The group estimates an ongoing cut in capital expenditure to over $5.5 billion in 2015 and less than $6.0 billion in 2016, and over $7.0 billion for 2017. Meanwhile, the group expects its global shipments for 2015 to decrease to 340 million tonnes (on a 100% basis) from its operations in Australia and Canada. RIO forecasts its share of bauxite, alumina and aluminum production for 2015 to reach 43 million tonnes, 8.0 million tonnes and 3.3 million tonnes, respectively.

• Stock Performance: The shares of Rio Tinto have been under pressure, delivering a year to date decline of 13.4% (as at Sep 8) impacted by the commodity prices volatility. On the other hand, Rio is positive on the growth ahead and estimates over three billion requirement of iron ore by 2030, which is a decent growth rate of 2%. Rio is also targeting markets beyond China in Asia. Meanwhile, RIO expects the global steel demand (excluding China) to improve by 65% by 2030. China continues to be the major demand region, followed by India (the country’s share (excluding China) is estimated to double from 10% by 2030). Rio Tinto has strong fundamentals and any recovery in iron ore prices would drive its shares higher in the coming months. RIO is a decent dividend player and has a solid dividend yield of 6.1%. We remain bullish on the stock and accordingly give a “BUY” recommendation at the current price of $51.51
•  

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2014 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.