Cost cutting helps Rio to defy the bears
Rio Tinto has roared back to profitability on the back of its global costcutting program, beating analyst expectations to post a $US4.6 billion ($6.02 billion) net profit for 2016 after the previous year’s impairment driven loss.
Rio said last week its global operations had delivered $US5.1 billion ($6.7 billion) in underlying earnings, easily beating consensus analyst expectations of $US4.9 billion ($6.4 billion), and $US8.5 billion ($11.1 billion) of operating cash flow.
The company said it would return $US2.4 billion ($3.1 billion) to shareholders after the results, including an improved $1.636-a-share final dividend — up from $1.519 at the same time last year — and a $US500 million ($653.8 million) buy-back of its London Stock Exchange-traded shares.
Rio’s Pilbara iron ore operations again drove the company’s result, with the division delivering underlying earnings before interest, tax, depreciation and amortisation of $US8.5 billion ($11.1 billion), up 11 per cent from 2015.
Underlying after-tax earnings from the Pilbara were up 17 per cent to $US4.6 billion ($6.04 billion), after export volumes increased 3 per cent, and its EBITDA margins rose by a similar amount to 63 per cent.
While Rio again managed to cut its Pilbara cash unit costs by 8 per cent to $US13.70 ($17.91) a tonne, it is its per-tonne margin that is the company’s focus, according to Rio Tinto boss Jean-Sebastien Jacques.
He said last week the push to reduce per-tonne costs was now less important than the company’s earnings margins, saying he would be happy to see costs rise if it meant Rio was producing a better quality product.
“The way I’m assessing the Pilbara is about the EBITDA margin,” he said.
“You can produce a lot of material but if it’s low quality, it doesn’t mean you’re going to make a lot of money out of it.
“We may increase our costs if we get better margins by producing a better quality product that is more valued by our customers.
“The primary driver for us is value over volume.”