Rio in fine shape: Fat Prophets

RIO Tinto has a robust balance sheet and ample cash flow, leaving it in a strong position to develop its pipeline of tier 1 assets to advance shareholder value across commodity cycles and over time, says tip sheet Fat Prophets.
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The Blair Athol mine, image courtesy of Rio Tinto.

Lou Caruana

The mining giant remains focused on ensuring future cash flows will be capable of accommodating its operations, it said.

“The balance sheet does remain in sound financial shape, despite the increase in the company’s total debt in the half,” it said.

“Total borrowings increased to $US29.5 billion from $26.3 billion from December 31, 2012, with net debt rising by only $2.9 billion at June 30, 2013.

“The company had a cash resource of $7.3 billion at the end of the half. We have no concerns over the current state of the company’s balance sheet.

“The company remains focused on ensuring its balance sheet is managed in a fashion to maintain its ‘A’ investment credit rating.”

The divestment of assets together with lower coal and uranium prices were behind the segment dipping into the red for the half. Underlying earnings were negative $52 million compared to $320 million for the same half in 2012.

Despite the weak pricing environment for the bulk of the company’s commodities across the half, operating cash flow was marginally higher by 1%, at $8 billion.

“The company cited the better volumes and its current programme of cost cutting initiatives for the positive outcome,” Fat Prophets said.

Part of the company’s cost-cutting initiative was lowering exploration and evaluation costs. The reported half saw $483 million (pre-tax) in costs taken out of this segment of the business.

“We consider this expenditure is the future life blood of the company. During a weak commodity cycle period however, it is prudent to take such action,” Fat Prophets said.

“Capital expenditure of the reported half was also lower by 8.7% on the corresponding 2012 half, at $6.9 billion.

“The company indicated that it remains on track to deliver the full-year savings of $750 million in exploration and a 20% reduction from the 2012 amount to $13-$14 billion.

Currency movements, especially the fall of the Australian dollar against Rio’s US dollar reporting currency, had a positive impact on underlying earnings.

“The company’s bottom line was positively impacted by exchange rate movements across the half, to the tune of $211 million,” Fat Prophets said.

“This amount was similar to the positive $200 million exchange rate variance for the first half 2012.”

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