Rio Tinto, the world’s largest iron ore producer, has reported a drop in its first-half underlying earnings to the lowest in three years. The decrease in earnings was primarily due to a decline in iron ore prices, although a rise in shipments from its Pilbara operations partially offset the impact. As a result, Rio Tinto also announced a dividend cut.
Iron ore represents a significant proportion of Rio Tinto’s profits, accounting for 70% of the company’s total. However, there is hope for a potential recovery in prices as China, the largest steel producer globally, is expected to implement more policies to stimulate economic growth. Despite a sluggish first half, the company’s CEO, Jacob Stausholm, expressed cautious optimism about China’s economy for the rest of the year.
In the first six months of 2021, Rio Tinto recorded underlying earnings of $5.7 billion. This figure is lower than last year’s $8.63 billion and falls slightly below the consensus of $5.85 billion. The decline can be attributed to lower commodity prices, as global consumption slowed during this period. Nonetheless, the company continues to observe strong demand for its products in China.
Although the average realized prices for Pilbara iron ore dropped by 11.1% to $98.60 per wet metric ton in the first half of the year, there was a 7% increase in shipments from Pilbara, reaching 161.7 million metric tons.
To address the economic challenges posed by the COVID-19 pandemic, Rio Tinto declared an interim dividend of $1.77 per share, below last year’s $2.67 and slightly lower than the consensus of $1.80.
Despite these difficulties, Jefferies, a financial services company, maintains a positive outlook on Rio Tinto’s stock. They believe that even a modest recovery in the Chinese property markets could greatly benefit the company, given its leverage in this sector.
However, Rio Tinto faces certain challenges, including a shortage of skilled workers in a tight labor market and supply chain disruptions. In addition, the company experienced a significant increase in costs for exploration and related activities, amounting to $700 million. This rise is primarily due to increased expenses at the Simandou iron ore project in Guinea and changes in scope and higher inflation at the Rincon lithium project in Argentina.
Furthermore, Rio Tinto recorded an $800 million after-tax impairment mainly linked to its Australian alumina refineries in Queensland. This impairment was triggered by challenging market conditions and higher projected costs associated with decarbonizing the high-emitting sector.
In an effort to expand its portfolio of critical minerals, Rio Tinto is exploring the extraction of minor metals, such as gallium and germanium, through processing. China, the leading producer of these metals, recently imposed restrictions on their exports. Currently, Rio Tinto already extracts scandium, which strengthens steel, through its Canadian titanium dioxide operations, and tellurium through its Kennecott smelter in the United States.
Rio Tinto’s Australian-listed shares closed with a 1.4% increase before the earnings announcement. However, its London-listed shares experienced a 2.3% decrease afterward.
In summary, Rio Tinto’s first-half underlying earnings declined to a three-year low due to falling iron ore prices. Nonetheless, the company remains cautiously optimistic about China’s economy and expects a potential recovery in prices. Rio Tinto continues to face challenges related to labor shortages and supply chain disruptions. The company is exploring the extraction of critical minerals through processing and aims to optimize its business model to navigate the evolving market conditions.
