Thursday, 6 August 2015

Signals from Rio Tinto

Even running the Rio Tinto share price in weak Australian dollar terms to try to pick up some benefit of selling in stronger US dollar terms the commodity equity malaise is very clear to see with only the dog days of 2008-9 have a lower share price over the last decade.

Unsurprisingly today's results could not dodge the impact of falling prices and these weighed heavily on the reported numbers as shown below.  Note however the good underlying work on cost reductions.   

Of course these continue as the constrained forward capex spending profile shows.  

But all of this is fairly well known.  What was perhaps more surprising for the casual observer was just how well margins held up in the much maligned iron ore space.  Of course it helps to have a tier 1 asset...

The above shows a very important point: with top class assets and cost discipline even in a lousy market it is possible to limit the retrenchment...although it does not help to have exchange losses on derivative contracts to push through the earnings line too. 

Nevertheless the bigger point is that Rio Tinto are a survivor...and one which currently pays a 5%+ dividend yield including an interim yield that was increased and a buy back policy that was continued: 

So is all of this sustainable?  Clearly you have to partially believe (akin to Vale's comments a week or two ago - link here) that capacity will come out of the market over time as it is inherently unprofitable plus underlying underlying conditions will rise.  Of course timing this is tough so what you also need is a good balance sheet.  With gearing levels at the bottom of their preferred range they have a little time.  

Overall the Rio Tinto numbers reminded me much of my comments on Royal Dutch Shell the other week (link here): 

'There is value from a reasonable time basis perspective...' 

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