Rio Tinto’s H1 2016 Earnings Review: Cost Reduction Remains On Track As Part Of Ongoing Response To Subdued Commodity Prices

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Rio Tinto’s earnings results reported yesterday provided evidence that the company’s cost reduction initiatives remain on track to meet annual targets, which will stand the company in good stead in the prevailing subdued commodity pricing environment. The company reported a 500 basis point decline in its underlying EBITDA margin ( a measure of profitability reported by the company which excludes the impact of one-time items on results), with the success of the company’s cost reduction initiatives and favorable currency movements (a stronger U.S. Dollar) partially offsetting the impact of the decline in commodity prices on results.

RIO H1 2016 Earnings Review

 

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Rio Tinto recently underwent a change in top management with John-Sebastian Jacques replacing Sam Walsh as the CEO. The new management team emphasized debt reduction, cost reduction, and disciplined capital allocation as prominent components of the company’s strategy going forward in the earnings conference call. The intention is to protect the company’s profitability and financial health at low points in the commodity cycle. All the major commodities produced by the company are currently characterized by subdued pricing environments with benchmark iron ore, copper, and aluminum prices standing 14%, 21%, and 13% lower respectively on a year-over-year basis in H1 2016. [1] Demand-side weakness as a result of slowing economic growth in China, the world’s largest consumer of these commodities, as well as a supply glut in the case of iron ore, have negatively impacted prices. As a result of sluggish Chinese economic growth and rising iron ore supply due to planned production capacity expansions by major iron ore miners, the seaborne iron ore supply glut is expected to widen to 100 million tons by 2018 from around 33 million tons this year. [2] With oversupply expected to characterize iron ore markets in the near term, the upside for the prices of iron ore remains limited in the near term. Check out our forecasts for Rio Tinto’s realized iron ore prices:

As the sale of iron ore accounts for nearly half of Rio Tinto’s revenue, weak top line growth implies that cost reduction will continue to be very important for boosting margins going forward. As evidenced by the H1 results, Rio Tinto remains on track to achieve its cost reduction target for the year. The company is targeting another $1 billion reduction in total costs for 2017 (with 2012 as the base year). [3] Given the prevailing commodity pricing environment, these measures will boost the company’s prospects going forward.

Have more questions about Rio Tinto? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rio Tinto

Notes:

  1. Rio Tinto’s H1 2016 Earnings Release, SEC []
  2. Morgan Stanley: Iron ore will drop to $35 by fall, Mining.com []
  3. Bank Of America Merill Lynch Metals And Mining Conference Presentation, Rio Tinto Website []