Rio Tinto Full Year 2017 Earnings Review: Higher Commodity Prices & Cost Reduction Initiatives Boosted Results

by Trefis Team
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Rio Tinto
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Rio Tinto (NYSE: RIO) released its full-year 2017 results on 7th February, delivering an 18% improvement in revenue numbers despite its production levels remaining subdued. Higher earnings were driven primarily by higher commodity prices and the resultant impact of the company’s cost-saving initiatives.

Key takeaways from Rio’s results have been summarized in our new interactive platform along with our earnings projection for the upcoming year. In the below paragraphs we discuss the fundamentals driving the company’s results in 2017.

Favorable Environment for Commodity Prices Boosted Results

Rio’s price realization for its major commodities including iron ore, aluminum, and copper registered an average growth of 20% compared to last year. China’s initiation of structural change had helped boost commodity prices in the second half of the year. As highlighted in our previous analysis, 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 producers like Rio and Vale, which produces premium blend iron ore which is comparatively less polluting to the environment.

Similarly, production cuts in China have supported the prices of both aluminum and copper by constraining the global supply of these commodities while their demand stayed intact. Additionally, the latest environmental policies in China are restricting the construction of new aluminum smelter capacity in the country which would continue to remain beneficial for aluminum prices in the upcoming quarters.

Significant Improvement In Operating Margins

Rio reported a ~15% improvement in its operating margin in 2017 largely driven by its cost-saving initiatives. Firstly, the company successfully completed its “cost-out program” by the first half of the year which was initiated in 2012, delivering a net savings of $8.3 billion in the past 5 years.

Additionally, the company has initiated a new program named Mine to Market (M2M) in 2017 which plans to deliver $5 billion of productivity improvement by 2021.The program focuses on maximizing the cash generation by the business, by improving both operational and commercial outcomes through optimized mine plans and improvement in processing recoveries. The program has already delivered a benefit of $400 million in 2017 and is expected to deliver a cumulative productivity benefit of $1.1 billion by 2018. (approx $700 million in 2018)

On the basis of such outperformance, the company also delivered a significant proportion of its earnings to its shareholders via dividends and share buybacks. The company paid a total of $9.7 billion to its shareholders, with the highest dividend paid in its 145-year history. Thus, Rio continues to remain attractive to its investors especially with its continued focus on “value over volume.”

We have a $47 price estimate for Rio Tinto, which is 14% below the market price.

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