Rio Tinto’s Full Year 2017 Earnings Preview: Higher Commodity Prices and Productivity Improvement Initiatives to Boost Results

by Trefis Team
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Rio Tinto
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Rio Tinto, the world’s second-largest producer of iron ore, will report its results for the full year 2017 and conduct a conference call with analysts on February 7. The company released its full-year production results in January depicting steady iron ore output and lower aluminum and copper output. However, despite stagnated production volumes, the company is set to benefit from higher commodity prices in 2017. The graph below depicts our expectation from the upcoming results. These have been created using our new interactive platform.

Commodity prices have displayed significant strength in 2017 owing to the structural changes initiated in China. China is one of the largest industrial economies of the world and hence any policy changes initiated in the country significantly impacts the supply and demand dynamics of major industrial commodities and has a material impact on their prices. China has been curtailing its industrial production during its winter months and also shutting illegal capacities in order to fight its alarming levels of pollution. This has remained beneficial for high-grade iron ore, although a fall in steel output in China should have ideally had a downward pressure on iron ore prices. China, due to its environmental policies has increased its demand for higher-grade iron ore which is comparatively less polluting. The price difference between high-grade and low-grade ore varied by greater than 35% by the end of 2017. This would remain an advantage to Rio given that its iron ore output has an average Fe content of 62%.

Similarly, production cuts in China have supported the prices of both aluminum and copper by limiting the global supply of these commodities while their demand stayed intact. Additionally, China’s latest environmental policies are limiting new aluminum capacity in the country. These factors have cumulatively resulted in a greater than 20% surge in the prices of all major commodities produced by Rio and hence would remain beneficial for the company in its 2017 earnings.

Additionally, the company’s $5 billion productivity program is expected generate $300 million of additional free cash flow in 2017. This strategy includes a range of technology-driven initiatives targeting productivity improvements through improved reliability and utilization rates. This should help prop-up earnings apart from the aforementioned factors supporting the commodity price rise. The company is also expected to announce a final dividend of $2 and which would make the stock attractive to its investors.

We have a $47 price estimate for Rio Tinto, which is below the market price.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking and encourages readers to comment and ask questions in 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
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