Rio Tinto: Delivers special dividend

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
02 August 2019, 5:43 PM
Sectors Covered:
Mining, Energy

  • Rio Tinto (ASX:RIO) delivered a US$0.61ps special dividend (vs Morgans US$0.40ps) along with a healthy ordinary dividend of US$1.51ps (vs Morgans US$1.55ps).   
  • 1H’CY19 Net Profit After Tax (NPAT) of US$4,932m (vs Morgans US$5,093m) was 3% below our estimate but close to the average of consensus estimates.
  • It is worth pointing out that RIO has now paid US$12bn to shareholders this year.
  • Pro forma net debt dropped to US$5.6bn, just 0.25x Net Debt-to-EBITDA (ND/EBITDA). 
  • RIO is trading close to fair value, although has ongoing capital management potential.  

Yield profile remains supportive

With little in the way of committed capex requirements, and earnings pumped up by the continuing iron ore rally, RIO pushed its payout ratio to 70% with the announcement of a special dividend of US$0.61ps (vs Morgans US$0.40ps) and ordinary dividend of US$1.51ps (vs Morgans US$1.55ps).

We also expect RIO to further grow its exploration spend and development assets (OTUG, Zulti South, Koodaideri Stage 1 & 2, and Robe River replacement volumes) in addition to greenfield projects (Resolution 0 – which is close to environmental approval, and the Winu discovery).

1H NPAT a touch below but still strong 

1H’CY19 underlying Net Profit After Tax (NPAT) of US$4,932m (vs Morgans US$5,093m).

Despite lower iron ore and copper volumes, RIO managed to report 1H group EBITDA margin of 47% (vs Morgans 48%).

Supported significantly by an EBITDA margin on RIO’s Pilbara iron ore business in 1H of 72% (vs 60% a year earlier).

Higher commodity prices (mostly iron ore) positively impacted RIO’s earnings by US$1.9bn, with FX (mostly Australian dollar weakness) benefited the big miner by US$386m.

This more than offset losses from higher cash costs on lower volumes (-US$481m), and cost inflation (-US$150m).

Still work to do at OTUG 

Updating the market on Oyu Tolgoi underground (OTUG) at its recent 2Q result, RIO outlined a 16-30 month delay to mid-2022-23 and capex blowout of US$1.2-$1.9bn to US$6.5-$7.2bn.

Following the large step down in valuation, RIO has written down the value of OT by US$2.3bn post-tax (US$0.8bn RIO’s share).

Stressing that it will not have to move any existing underground infrastructure, RIO is assessing how best to alter its mine plan to compensate for the rock instability encountered.

RIO expects to have an outcome by 2H’CY20.

Return profile boosts investment appeal

Recent volatility has seen RIO’s share price trade back towards our price target, which has increased (Morgans clients can view the full report & price target here) post the 1H result.

Even trading near fair value, RIO’s investment appeal remains high with an EBITDA margin of 47%, dividend yield of 6.4%, FCF yield of 8.4% and EV/EBITDA of 5.4x.

As a result we maintain our Hold recommendation. The key risk to our call remains commodity prices and macroeconomic risk (demand drivers).

More information

Morgans clients can login to view further detailed analysis on the August 2019 Reporting Season by clicking on the 'reporting season' link in the popular topics box on the right-hand-side of the blog homepage. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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