Solid as a Rock

Rio Tinto reported CY17 operating earnings of US$18.6bn and underlying earnings of US$8.6bn, in line with our estimates and consensus. A full-year dividend of $2.90 per share was declared, versus our $2.74 estimate, while the US$1.9bn buyback program was topped up by US$1bn, as expected.

 

CY18 production and capital expenditure guidance of US$5.5bn was unchanged.

 

Overall, we viewed the result as solid. We maintain our Hold recommendation, with the stock trading close to our valuation, while our target price has increased slightly to $76.00 from $75.00.

  • Net debt – Net debt was higher than expected at US$3.8bn, although this was due largely to the low tax paid in CY17 – there is a catch-up in the CY18 numbers. The US$1.9bn buyback program was topped up by US$1bn, as expected.
  • Dividend – Shareholder returns were higher than expected, with the full-year dividend of $2.90 per share ahead of our $2.74 estimate.
  • Capital expenditure – Rio Tinto’s capital expenditure continues to come in below budget. Management noted the medium-term budget of $5.5bn in 2018 and $6bn in 2019/20 was unlikely to change due to better market conditions.
  • Costs – Management noted cost inflation pressures were growing, which was particularly evident in Pacific Aluminium where costs were up US9c/lb half-on-half. Unit costs also increased in coal and copper. Iron ore managed to buck the trend with a 2% year-on-year cost reduction. We have factored in higher metal price forecasts, but we have also put through higher cost inflation.

We recognise Rio Tinto is in strong financial shape, but we believe this is reflected in the recent share price strength. The stock is trading broadly within its fair valuation range, in our view, and we struggle to identify a positive catalyst to drive it materially higher. That said, given global growth conditions are the strongest in eight years, we would look to become more constructive should the shares pull back to a more attractive entry point.

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