Rio Tinto: Result 2017
The headline number is impressive, but the deeper you delve the better it gets.
That this would be a strong result was never in doubt. Iron ore, copper and even coal prices have risen and, in aggregate, higher commodity prices added $US4.1bn to Rio Tinto’s full-year profit.
The best thing about this cracking result from Rio, though, was disciplined capital expenditure and thoughtful project development.
Operating cash flow swelled by 60% to more $US13bn and the miner generated a staggering $US9.5bn in free cash flow.
Rio’s iron ore business is forecasting unit production costs of just $US13 a tonne. A further $US5bn in productivity gains have been outlined over the next few years as Rio reaps the benefit from investment in automation and efficiency gains.
Iron ore is, of course, the key commodity, generating about 70% of earnings but aluminium remains a bright spot and now contributes over $US1.5bn in earnings to the group. Five years ago, aluminium profits totaled just $US50m.
Importantly, these assets are low cost and underutilsed with Rio nursing significant latent capacity in both power generation and output which could be cheaply utilised if prices rise.
We estimate the iron ore division alone is worth over $50 a share and the aluminium business another $15 or so. That doesn’t count copper, diamonds and specialty minerals which are all valuable bits of the business. Today’s share price of $77 doesn’t appear excessive against outstanding asset quality and best in industry costs.
We’re raising our price guide and would consider upgrading Rio below $65. For now, HOLD.