Rio Tinto's underlying fiscal 2009 earnings fell 39% to $6.3 billion, close to our $6.5 billion forecast. Net operating cash flow fell 40% to $8.9 billion, again close to our $9.2 billion prediction. Headline profit rose 33% to $4.9 billion and included negative $1.4 billion of exceptional items, including yet another impairment charge relating principally to Alcan, which was surprising as Rio had already written off $7.6 billion in 2008.
Weaker earnings reflect higher volume and admirable cost reduction flailing against a tide of weaker commodity prices, particularly for the bulks. The iron ore contract fell 40% to $63 per tonne, and the coal benchmarks halved. Aluminium and copper declined by one third, with falls most severe in the first half. Controllable operating cost savings of $2.6 billion exceeded the target, while iron ore sales volume was at record levels and copper and gold also enjoyed gains.
Compared with our forecasts, a stronger-than-expected performance from iron ore and thermal coal offset weaker-than-anticipated copper--and to a lesser extent, aluminium--performance. Cost control featured, but a higher proportion of bulk sales into a strong spot market (though not quite to the extent of BHP Billiton) was offset by unexpectedly low translation of higher second-half copper prices to the bottom line, basically a similar trend to BHP.
This was a pleasing result from a company still recovering from Alcan-debt-inspired woes. The EBITDA margin remained strong at 33%--though at 10%, return on invested capital is too low. The latter should improve in 2010, given asset sell-downs and improving prices. Cash receipts from some of the high-profile Alcan noncore assets will slip into first half of 2010. The bulk of the programme begun two years ago is now complete, with total receipts of $8.8 billion out of $10.3 billion agreed. Alcan Food Americas' $1.2 billion and Alcan Packaging's $1.9 billion await regulatory and other issues. This means that Rio's net debt at $18.8 billion and gearing at 41% are a tad higher than we anticipated. Gearing is no longer onerous and, excluding the potential for acquisitions, we anticipate rapid paydown including remaining asset sales and the Pilbara iron ore joint venture proceeds.
Capital expenditure is expected to be at least $5 billion in fiscal 2010 with potential for a further $1 billion on new investments. This is higher than prior damage-control guidance and in line with 2009. Capex is the real measure of the confidence in the outlook for commodities, despite somewhat hawkish overtones in the outlook statement.
Rio needs to tread a bit carefully on the expenditure front--shareholders won't let the company forget the life-preserving capital injection they bestowed not so very long ago. Perhaps this was why the $0.45 dividend was lower than expected. We had thought Rio might try to make up for the lack of an interim dividend. The company says the total fiscal 2010 cash dividend will equal $0.90 per share, of which $0.45 will be paid in the first half.
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