What Is The Largest Expense Component For Rio Tinto And How Is It Expected To Move Going Forward?

Rio Tinto (NYSE: RIO) expenses have trended steadily lower from around $29.0 billion in 2016 to about $26.6 billion in 2018. As a percentage of revenues, expenses have decreased from 86% in 2016 to 66% in 2018. Company’s expenses are largely driven by net operating cost, which includes cost related to raw material, depreciation, shipping, R&D, etc. Net operating cost as a % of revenue has continuously declined from 79% in 2016 to 67% in 2018, due to rising revenue base, increasing volume sold and higher price realization per ton, which decreased cost of production per ton, along with lower depreciation. This decline has added a little over $5 billion to the company’s profits (i.e. cost would have been higher by $5 billion if net operating cost would have remained around 79% of revenues in 2018 as well), which translated into additional earnings of $2.93 per share between 2016 and 2018.

In our interactive dashboard – How Does Rio Tinto Spend Its Money? we take a look at the key drivers of Rio Tinto’s expenses and net margins.

Total Expenses

• Rio Tinto’s total expenses as percentage of revenue has been on a decline over the last few years.
• It stood at 66.3% in 2018 as against 86.3% seen in 2016.
• However, it is expected to increase to 78.2% in 2020, due to higher impairment cost and projected decline in revenue due to a drop in global iron ore prices.

Breakdown of Rio Tinto’s Total Expenses

Net Operating Cost

• Net operating cost, which accounts for almost 80% of RIO’s total expenses, includes cost related to raw materials, employment, shipping, research & development, etc.
• Net operating cost as % of revenue has decreased over recent years and is expected to decline further in 2019 due to higher revenue and lower depreciation cost.
• However, the metric is expected to decline in 2020 as revenue is likely to decrease following a drop in iron ore prices.

Impairment

• Impairment cost has been around 2% of revenue over recent years, but is expected to increase sharply to about 5.7% in 2019,  mainly driven by a total impairment of $2.35 billion recognized in the first half of 2019 itself, related to a decrease in recoverable value of RIO’s 2 assets – ISAL Aluminum Smelter and Oyu Tolgoi (copper and diamond unit).
• The metric is expected to decrease to historical average levels in 2020.

Net Finance Cost

• Net finance cost as % of revenue has been continuously decreasing over recent years due to deleveraging.
• To understand how Rio Tinto’s net finance cost is expected to trend going forward, view our interactive dashboard analysis

Loss/(Gain) on Disposal

• Gain from disposal of assets has been increasing over recent years, with it increasing sharply in 2018 due to significant gains from the sale of its coal business, along with a few aluminum assets and its stake in the Grasberg mine in Indonesia.
• In the first half of 2019, there was no gain/loss recorded. We do not expect any sale of business in the second half of the year as well, and hence the metric is expected to be nil in 2019 and 2020.

Derivative Loss/(Gain)

• The company has made derivative gains in two of the last three years.
• Derivative gains are expected to decrease in the next two years and are likely to continue to be less than 2% of revenues in 2019 and 2020.

Effective Tax Rate

• Effective tax rate has been volatile over recent years, with it decreasing sharply to 23.4% in 2018 from 30.9% in 2017.
• The metric is likely to remain close to current level over the near term.

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Data

Like our charts? Explore example interactive dashboards and create your own.