Joint Statement by Baillieu Limited Chairperson David Trude and Managing Director Gavin Powell

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First Glance | RIO – Lock it in and build on higher prices in 2H

 

First Glance

29 July 2020

Rio Tinto RIO
Lock it in and build on higher prices
         
Rating*: SELL Price Target*: $86.00 Share Price: $103.60
*Note: Rating and Price Target recorded at pre-announcement levels as detailed in our research report dated 21 July Month 2020. This may be subject to review or change
Snapshot: 1H20 results should be well received with a 5% beat at the EBITDA level and 10% on Underlying earnings relative to consensus. Segment earnings and EBITDA were down 7% on 1H19 and underlying earnings of US$4,750m were 4% lower than 1H19. Reported profit lower at US$3,316m due to impairments and provisions. DPS as expected at US$1.55ps (payout ratio 53%). Commodity prices now higher than the first half which would imply a beat to consensus FY20 underlying EBITDA of US$19.061m (1H US$9,640) and underlying earnings of US$9.030m (1H $4,750m).

 

EBITDA down 6% on 1H19: Still a good number US$9,640m. The rally in the iron ore price this year makes you forget how strong last year and how weak aluminium and copper have been this year (see Fig 2 below). The iron ore price was only up 0.5% yoy and copper was down 11% and aluminium prices were down 13%.

Impairments hit reported profit: The reported profit was US$3,316m was US$1,434m lower than the underlying profit of US$4,750m due to impairments of US$1,033m in four aluminium smelters & Diavik plus fx and closure provisions.

Balance sheet strong: Cash generated from operations was US$5.6bn was 12% lower due to lower prices for aluminium, copper and lower dividends. Net debt increased US$1.2bn to US$4.8bn, gearing ratio is still a low 10% (up from 7% in December following the final div).

Production guidance: unchanged.

Projects: Simandou is “progressing”, RIO is working with partners to optimize infrastructure elements (ie Chinese to update and re-engineer the rail line to the coast). A full feasibility study has been approved for the Jadar lithium project. Winu copper-gold project to be in production in 2023. Koodaideri on track for early 2022 ramp-up.

Q&A takeaways:

  • COVID – now have a clearer view of how many people they do need on site and rather than working remotely and this will be a permanent change, global supply chain needs to be reviewed and they will look at inventory levels required, offshoring contracts will likely be reduced, cant assume that they can send staff all over the world at short notice which may see more skills developed;
  • Windfall taxes – no talk of increased taxes and royalties in Australia (obviously got some press overseas);
  • Juukan Caves – “very sorry, didn’t mean to create an issue”, obviously a lot of reviews going on and the delegated authorities have been changed to ensure everything is reviewed, no change to 2020 mine plan and guidance, 2021 and beyond may see some changes to avoid sites but not quantified;
  • Simandou – the development of Blocks 3&4 within the RIO JV may also take into account options of sharing infrastructure with Blocks 1&2, they see ore as a compliment to production from IOC and Pilbara, interesting question on cessation or scaling back low grade Pilbara was not answered (probably too early and too controversial now);
  • Climate – have set at aside capex but do need a change in technology to meet 2050 target;
  • Iron ore capex – pretty much admitted that the operations had been undercapitalized (my view is that this was all part of the cost out strategy) but that capex at the current guidance levels was all that was needed rather than any more catch-up.

 

 

Fig. 1: Actual versus consensus
Source: RIO, VUMA

 

Fig. 2: Underlying EBITDA waterfall – 1H20 on 1H19
Source: RIO

 

 

 

 

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Warren Edney
Research Analyst

E.L. & C. Baillieu Limited
ABN 74 006 519 393 Level 22, 35 Collins Street
AFS Licence No. 245421 Melbourne VIC 3000 Australia
Direct  +61 3 9602 9384 Mobile +61 4 32322275
Phone +61 3 9602 9222 Email wedney@baillieu.com.au
baillieu.com.au

 

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