Rio Tinto: Interim result 2012

Rio Tinto’s net profit for the half-year to 30 June fell 22% to US$5.8bn. Underlying profit, which excludes asset sales, fell 34% to US$5.2bn. From earnings per share of US$2.78, a fully franked interim dividend of US$0.725 was declared (ex date 15 Aug).

Although operating cashflow fell 39% to US$7.8bn, Rio is maintaining its previous capital expenditure targets; US$7.6bn was spent during the period. For the full year, Rio expects to spend US$16bn. Such prodigious outflows, plus more than US$3bn in dividends and buybacks in the first six months of the year, were made possible by increasing debt, which expanded by US$4.7bn and now stands at over US$20bn. It is concerning that lower cash inflows aren’t being matched by lower outflows.

Falling prices sent profits down. Iron ore, aluminium and copper, the commodity trio that matter most to Rio, all experienced heavy price falls, which detracted almost US$2bn from net profit. Falling iron ore prices alone wiped out more than US$1.1bn in profits and yet the average price received by Rio Tinto was some 15% higher than what it is today. Lower prices will no doubt feature prominently in the full year result.

The aluminium division remains a concern. Tumbling aluminium prices drained more money than the entire division made this time last year. Aluminium houses US$27bn in operating assets yet contributed just US$24m in profits. The mistakes of the past continue to haunt the company.

The miner's iron ore division remains its salvation. Output will rise from less than 250m tonnes per annum (mtpa) today to 283mtpa next year and 353mtpa in 2015. These expansions are among the cheapest in the industry, so what Rio is losing from falling prices it may well recapture from higher volumes. We’re yet to be convinced that this makes the business a buy, as return on assets will likely fall. With the share price down 3% since 30 May 12 (Hold - $58.41), we’re happy to wait for a better opportunity. HOLD.