Rio Tinto: Whopper first half dividend

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
30 July 2021, 12:00 PM
Sectors Covered:
Mining, Energy

  • Rio Tinto (ASX:RIO) delivered strong 1H21 earnings slightly ahead of consensus, while again flexing its payout ratio.
  • Metal price strength across iron ore, copper and aluminium carried the result against a backdrop of lower volumes and higher costs across the business.
  • RIO is working hard to rebuild confidence in its operational and social reputation. We have upgraded short term iron ore prices on current spot strength.
  • Buoyant metal prices are overwhelming operational, cost and social pressures. We maintain our HOLD rating, seeing RIO as close to fair value on a TSR basis.

Event

Rio Tinto (ASX:RIO) reported a solid 1H21 financial result, with strong metal prices helping the miner overcome a weak half in operational terms.

The highlight of the result was the bumper interim dividend, announcing an US$3.76ps ordinary dividend as well as a US$1.85ps special dividend (vs Morgans US$4.00ps first half div estimate).

RIO posted 1H21 underlying NPAT of US$12,166m (vs consensus US$12,007m vs MorgE US$10,788m) +156% pcp.

1H21 underlying EBITDA of US$21,037m (vs consensus US$21,086m vs MorgE US$18,030m) +118% pcp. With an impressive group EBITDA margin of 64%.

The key to RIO’s strong earnings remains its flagship Pilbara iron ore business, but an impressive step up in the profitability of its aluminium business. 1H21 ali earnings grew to US$921m, vs US$193m a year ago, improving the segment’s ROCE to 12% (up from just 3% in 1H20).

Interestingly along with the result RIO announced its board had approved funding for the Jadar lithium project in Serbia, despite not yet having secured environmental approvals or an exploitation licence. RIO expects the latter shortly, while we will have to wait until RIO’s capital markets day in 4Q21 for key project metrics and expected return profile. RIO expects construction to start in 2022 and first lithium carbonate production in 2026.

Not much news on OTUG where progress has understandably slowed given the material COVID impact and recent elections in Mongolia. While Simandou news might be slow coming with RIO working on establishing support on the ground.

Analysis

The fact that group ROCE could increase to an impressive 50% (vs 21% a year ago) despite lower production and higher opex across the business is really a testament to the size of strength in metal prices. In particular iron ore, which dominates RIO’s earnings.

While it cannot control metal prices, RIO is making smart decisions with its capital. We need more information on Jadar, but see the potential for a tier 1 lithium asset if RIO can secure permitting and bed down key aspects such as processing.

The key short-term challenge remains RIO’s ability to bring on the 90mtpa of replacement iron ore capacity in the Pilbara in 2H21, and broader cost headwinds.

Forecast and valuation update

We have lifted 2H21 payout ratio to 75% (from 60%) and applied higher iron ore prices (summary further). Our target price increases to (login to view).

Investment view

Yet again buoyed by bumper cash dividends, we see RIO’s return profile as balanced on a TSR basis. We maintain a HOLD recommendation.

Price catalysts

3Q21 operational result, with RIO highlighting the rain impact on 1H21.

Late 2021 capital markets day in Sydney, for outlook and project commentary.

Risks

Iron ore price risk to our investment view has increased in line with spot prices.

COVID risk to global demand drivers.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


 

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