Rio (ASX:RIO) sets poor tone for resource major earnings

Rio Tinto (ASX:RIO) has kicked off June 30 reporting for the world’s resource majors that will probably mark the peak period for the sector as prices ease, demand weakens and Covid and cost increases eat into margins.

BHP, Glencore, South 32, Oz Minerals and Vale are all due to follow Rio in the next few weeks, starting with Vale later this week.

For Rio, it was as though last year’s record results were reversed – iron ore profit fell 37%, copper dropped 39% and minerals’ profits lost 16%. Only aluminium saw a gain – up 68% but clearly not enough to offset the weaknesses elsewhere.

And there’s no respite with iron ore, copper and aluminium all weaker now than they were in the first six months of the year – especially iron ore and copper.

But that won’t stop the company from planning to spend up to $20 billion across the company on new mines and other facilities, as well as existing assets – $US1.5 billion of that figure will be spent each year (subject to inflationary pressures) in its iron ore business in WA’s Pilbara.

That will be part of plans to spend around $US7.5 billion a year – or $70 billion between 2022 to 2030.

Interim net sales fell 10% to $US29.77 billion for the half year and the company’s various profit measures were fell from the record levels of the first half of 2021 when iron ore and copper prices hit highs.

Interim dividend fell to 267 US cents a share, down from the all-time high of 376 cents a share a year earlier when a special dividend of 185 cents a share was also declared.

CEO Jakob Stausholm said in the statement on Wednesday afternoon, “Market conditions were good, albeit below last year’s record levels. We delivered largely flat production and solid financial results, with underlying EBITDA of $15.6 billion, free cash flow of $7.1 billion and underlying earnings of $8.6 billion, after taxes and government royalties of $4.8 billion.

“As a result, we are paying our second highest ever interim dividend of $4.3 billion, a 50% payout, in line with our policy. The market environment has become more challenging at the end of the period.”

Underlying EBITDA fell 26% to $US15.597 billion from $US21.03 billion in the first half of 2021.

Net earnings dropped 28% to $US8.9 billion from $US12.3 billion which Rio said “reflected the movement in commodity prices, the impact of higher energy prices on our operations and higher rates of inflation on our operating costs and closure liabilities.”

A lower effective tax rate of 24.5% helped with compared with the 28.5% for the first half of 2021. And currency movements (mainly the rise of the US dollar against other currencies, added $US312 million to earnings, according to Rio

Iron ore is Rio’s most important commodity and with production and sales solid in the six months the returns were always going to slide as world prices more than halved at one stage during the period.

Rio received an average of $US120.50 a dry tonne of iron ore over the past six months; down from $US168.40 in the first half of 2021 when prices hit all time peaks above $US240 a tonne. Prices for 62% Fe fines have fallen to around $US108 a tonne at the moment.

Iron ore net earnings totalled a still impressive $US6.461 billion, down from $US10.216 billion in the first half of 2021. Copper earnings fell to $US543 million from $US885 million and earnings from the generic group, ‘minerals’ totalled $US420 million, down from $498 million.

Aluminium saw the only gain – a rise to $US1.547 billion from $US921 million.

Other points of note from the report – Rio increased its exploration and evaluation spending by 13% to $US367 million in June half, as it “ramped up activities in Guinea, Argentina and Australia.”

In Argentina, the company settled the acquisition of the Rincon lithium project and the board has approved $US190 million to develop a small starter battery-grade lithium carbonate plant with a capacity of 3,000 tonnes per year and first saleable production in 2024.

“The approval also includes early works to support a full-scale operation, including power line and associated substations, construction camp and airstrip.”

Rio also revealed it has made a small trim to its planned investment (following a similar move by copper miner, Freeport Mac Moran) It says it has trimmed $500 million from the estimate for its share of capital investment of around $US7.5 billion (previously $US8.0 billion) in 2022.

“In each of 2023 and 2024, we expect our share of capital investment of $9.0 to $10.0 billion, which includes the ambition to invest up to $3.0 billion in growth per year, depending on opportunities.

“Each year also includes sustaining capital of around $3.5 billion, of which around $1.5 billion a year is for Pilbara iron ore, subject to ongoing inflationary pressure.

“Around half of our share of capital investment is denominated in Australian dollars.

“In addition, our guidance includes around $1.5 billion over the next three years on decarbonisation projects, mainly relating to repowering the Pilbara: this will accelerate from 2025, bringing our best estimate to around $7.5 billion, in aggregate from 2022 to 2030,” Rio said.