Rio Tinto (NYSE:RIO) reported fourth quarter earnings on Thursday which failed to meet expectations as higher than expected impairment charges related to its aluminum business ate into its 2011 earnings. The company’s full year revenue increased by nearly 10% to $60 billion and net income dropped by to 59% to $5.8 billion in 2011 compared to 2010, which would have been around 3% growth excluding the write off. [1] The revenue growth was mainly driven by higher commodity prices and higher iron ore volumes. Rio Tinto is banking on demand from the Chinese market and remains optimistic. However, the company remains cautious regarding the volatility in commodity prices, rising raw material prices and labor costs, which may squeeze its margins. Rio Tinto is a global diversified miner with a product portfolio spanning basic metals like iron ore, copper and aluminum to energy products like coal and uranium. It competes with other mining giants like Vale (NYSE:VALE), Freeport McMoran (NYSE:FCX) and Barrick Gold (NYSE:ABX).
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Iron ore volumes increase, copper volumes decline
In 2011, iron ore production and shipments topped 245 million and 239 million tons, respectively, which were complemented by higher iron ore prices. Copper sales were down primarily due to lower production and shipments, partially offset by higher spot prices.
Given the fact that iron ore constitutes 40% of our price estimate for Rio Tinto’s stock, we expect that any further growth in this division will have a meaningful positive impact on the company’s value.
Acquisition of Alcan aluminum business proved pricey
Rio Tinto wrote down its aluminum business at Alcan and took a higher than expected one-time impairment charge of $8.9 billion. Rio acquired Alcan in 2007 for $38 billion, drawing considerable flak from many investors, and has now written down nearly half of that investment. Significant supply in the industry and compressing margins led management to revisit its strategy for the aluminum business. Last October, the company announced plans to sell part of its aluminum business.
Additional $3 billion investment in expansion
The strong demand outlook from Asian markets has propelled the company to commit more money to its ongoing expansion of iron ore operations in Western Australia, earmarking nearly $3 billion for the expansion. The company will invest $2.2 billion in the Nammuldi iron ore mine and $700 million (its share of a total $1.2 billion investment) in Cape Lambert.
Increases dividend to reaffirm its positive outlook on business
To woo investors, the company increased its full year dividend by 34% to $1.45 per share to reflect its confidence in the business despite the decline in profitability. We are in the process of reviewing our forecasts for the company to incorporate Q4 earnings and the 2012 outlook.
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Notes:- Rio Tinto announces record underlying earnings of $15.5 billion – net earnings reduced by impairment charge, Company Press Release, Feb 9 2012 [↩]
