Rio Tinto’s Earnings: Writedowns And CEO Replacement Raises Questions On Outlook

by Trefis Team
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Rio Tinto (NYSE:RIO) will declare its annual results on Thursday, February 14. The company released its operations review report for 2012 in January where it reported record quarterly iron ore production, primarily on increased production from its Pilbara mines in Australia. Iron ore constitutes the bulk of Rio’s portfolio. Copper, bauxite, alumina, thermal coal, and titanium dioxide production were all higher in 2012 compared to 2011. Only the production of aluminum and thermal coal showed a decline due to maintenance and other operational issues at Rio’s facilities. ((Fourth quarter 2012 operations review, Rio Tinto))

The positive operations review report was later overshadowed when the company surprised markets by announcing a $14 billion writedown of assets in its aluminum and Mozambican coal businesses. It simultaneously announced the departure of its CEO Tom Albanese who had overseen these acquisitions. The writedown will be recorded as a post-tax non-cash impairment charge of $14 billion in the company’s 2012 full year results. [1]

The news about writedowns is definitely bad news for this year’s financial results. We now expect Rio to show negligible profit if any when it announces results on February 14. Sam Walsh, who was announced as Albanese’s replacement, is 63 years old. It thus seems likely that he is an interim replacement and will be succeeded by somebody younger 2-3 years down the line. Given his professional background, we expect Rio Tinto to be in consolidation mode for some time.

See Full Analysis for Rio Tinto Here

Operational Performance

Global iron ore production figure at Rio’s facilities stood at 253 million tonnes, of which 199 million tonnes was its own share. This was 4% higher than the previous year’s figure. Most of Rio’s iron ore production comes from the mines in the Pilbara region of Australia. Production from this mine stood at 239 million tonnes, of which 191 million tonnes belonged to Rio. The shipments of iron ore stood at 247 million tonnes. Iron ore prices have risen steeply since September so we expect that to be reflected in Rio’s fourth quarter’s core profit numbers. The rising demand from Chinese steel mills which are restocking inventory is being touted as the main reason for rising prices.

You can check the effect of iron ore shipments on Rio’s Trefis valuation using our interactive graph below:

Copper production rose by 6% as compared to 2011, mainly due to recovery in ore grades at Kennecott Utah Copper and Escondida mines. Despite the growth, this fell short of Rio’s guidance of 560,000 tonnes, which was a revised figure issued in October after lowering of the initial guidance by 20,000 tonnes. The shortfall is being attributed to problems at the Palabora mine in South Africa, which Rio recently agreed to sell to a Sino-South African consortium. [2]

While the production of bauxite and alumina rose by 11% and 12%, respectively, driven by increased third party demand for bauxite and expanded refining capacity at Yarwun, the production of aluminum declined by 10%. Aluminum production suffered as it took time to ramp up production to normal capacity following resolution of the Alma labor dispute.

Impact Of Writedowns

Of the $14 billion, a charge of $10-11 billion will be taken against aluminum assets while approximately $3 billion will be taken as a charge against the Mozambican coal assets. Smaller writedowns of the order of $500 million will account for the rest. The writedown on aluminum assets is to be taken mainly in the Rio Tinto Alcan division, but assets in the Pacific Aluminum division will also account for a portion of it. [3]

Rio reported underlying earnings of $15.5 billion in 2011 and net profit of just $5.8 billion, mostly due to the $8.9 billion impairment charge it had to take against the aluminum assets that year. Net earnings declined by 59% year-over-year. [4]

In 2012, Rio reported half yearly net earnings of $5.9 billion, down by 22% year-over-year due to lower iron ore prices. While iron ore prices shot up dramatically in the fourth quarter of 2012, Rio will still not make up for the poor performance in the first half of the year. The annual earnings, not taking into account the impairment charges, will therefore be lower compared to 2011. With the impairment, we expect Rio to post a net loss or a negligible profit. [5]

We also expect the company to provide an insight into its future strategy for the Mozambican coal operations and the aluminum business.

We have a Trefis price estimate for Rio of $45 which we will revise once the fourth quarter earnings results are out.

Understand How a Company’s Products Impact its Stock at Trefis

Notes:
  1. Rio Tinto impairments and management changes, Rio Tinto Media Release []
  2. Rio Tinto boosted by iron ore resurgence, Financial Times []
  3. Rio CEO Albanese Steps Down as $14 Billion Writedown Looms, Bloomberg []
  4. Rio Tinto Media Release, Rio Tinto []
  5. Rio Tinto Media Release, Rio Tinto []
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