Cost cut­ting helps Rio to defy the bears

Pilbara News - - News - Nick Evans

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.”

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