Rio Tinto: Keeps focus on returns

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
23 February 2023, 8:30 AM
Sectors Covered:
Mining, Energy

  • H2 earnings slightly trailed expectations, with Rio Tinto's (ASX:RIO) announced dividends for the year totalling US$8bn against FCF of US$9bn.
  • EBITDA was US$26.3bn (vs consensus US$26.7bn/MorgansE US$26.3bn).
  • Underlying NPAT was US$13.3bn (vs consensus US$13.7bn/MorgansE $13.3bn).
  • Final dividend was US$2.25 (vs consensus US$2.20/MorgansE US$1.82).
  • Pilbara iron ore is off to strong start in 2023, although still early in the wet season.
  • OTUG is approaching critical start-up phase.
  • We maintain a HOLD rating on RIO, with a (login to view) target price.

CY22 result

Underlying EBITDA was close to estimates at US$26.3bn (Visible Alpha consensus US$26.7bn vs MorgansE US$26.3bn), with the result -30% yoy. ▪ Underlying NPAT came in below estimates at US$13.3bn (consensus US$13.7bn / Morgans US$13.3bn), -38% yoy.

RIO’s final dividend actually outpaced estimates at US$2.25ps (consensus US$2.20 / MorgansE US$1.82), for an annualised 5.2%, but RIO could not escape the optics around its dividend halving from the level it was a year ago. 

Net debt at year end reached US$4.2bn (vs a net cash balance a year ago of US$1.6bn). 

First production from Oyu Tolgoi underground (OTUG) is still expected during 2023 (with a ~four-year ramp up). 

Negotiations with the Guinean government on Simandou continue, with RIO working hard to secure the support of local stakeholders ahead of advancing the project to a stage of being development ready.


Analysts on the result call focused on the decline in RIO’s 2022 payout ratio to 60% (down from 79% a year earlier and recent averages), but it still appears a healthy dividend with RIO paying out US$8bn of the US$9bn of FCF generated in the year.

While RIO did not exactly cut its dividend, we do view it as reasonable to expect RIO to trim its payout ratio further, especially in a period where RIO is pursuing multiple avenues for growth including the TRQ and Rincon acquisitions and increasing OTUG spend. 

In general terms it was a tough half for RIO with the big miner poorly positioned to defend against a difficult operating and cost environment given the ongoing productivity issues across its global business.

With that said, greenshoots around an improving operating performance could be emerging in the Pilbara (WA iron ore), where it appears in early 2023 RIO has maintained the strong run rate it finished with in 2022.

This builds on management’s assessment that each of its Pilbara assets finished 2022 in better shape than they entered the year, although management did caution against forming positive conclusions so early in the year. 

A key focus area in the result call was on OTUG with initial production still expected in 2023. The project is advancing toward a critical stage of development, and while RIO is clearly being cautious with the new mega-mine, ultimately it can only learn so much before commencing mining of Panel 0.

Forecast and valuation update

We have made marginal adjustments to our estimates following the CY22 result. We have also increased our assumed floor dividend payout ratio to 60% for FY23 and FY24.

Post changes our target price is revised to (login to view).

Investment view

We view RIO as trading at a modest premium to our (login to view) target price on a total shareholder return (TSR) basis, with ongoing cost pressures and execution risk around key growth projects.

We maintain our HOLD rating.


  • Metal demand drivers (global growth).
  • Execution risk on growth projects.

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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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