Rio Tinto (ASX:RIO) announces 20% profit fall in HY20

Rio Tinto (ASX: RIO) has announced a 20% profit fall in the first half of its FY20.

Rio Tinto is one of the largest miners in the world with a large focus on iron ore. However, it also mines bauxite, alumina, aluminium, copper and carats.

Rio Tinto’s HY20 result

The major miner announced that in the first half of FY20 it generated net cash from operating activities of US$5.6 billion, down 12%. This decline was mainly due to lower prices and the effect of timing differences – in June 2020 the company made a $1 billion payment of Australian income tax.

Rio Tinto’s free cash flow fell by 28% to US$2.8 billion. This was a result of the lower operating cashflow as well as a 13% increase of capital expenditure to US$2.7 billion.

Rio Tinto revealed that underlying EBITDA (click here to learn what EBITDA means) fell 6% to US$9.64 billion and underlying earnings dropped 4% to $4.75 billion. These profit figures fell, according to Rio Tinto, because of lower aluminium and copper prices. However, iron ore prices were stable. Underlying profit/earnings per share (EPS) declined by 3% to US$2.937

Statutory profit/net earnings fell 20% to US$3.3 billion. This was due to $1 billion of impairments relating to four aluminium smelters and the Diavik diamond mine. Exchange rate movements also had an effect.

Rio Tinto HY20 dividend and balance sheet

Rio Tinto’s board decided to increase the ordinary dividend per share by 3% to US$1.55.

Net debt increased by US$1.2 billion to US$4.8 billion. This reflected the US$3.8 billion of cash paid to shareholders during the first half, partly offset by the free cash flow of US$2.8 billion.

Management comments

Rio Tinto Chief Executive J-S Jacques said: “We have been agile and adapted our way of working, to deliver another resilient performance while navigating the new and ongoing challenges of dealing with COVID-19. Despite the challenging backdrop, we generated underlying EBITDA of $9.6 billion with a margin of 47%, driven by our strong and stable operations, with all of our assets continuing to operate throughout the first half.”

Summary

Rio Tinto confirmed its 2020 production guidance across all commodities, which is a good sign. I’m pleased that the dividend was slightly increased for shareholders in this difficult COVID-19 time, however the increase in net debt wasn’t a positive change. It was a solid result for existing shareholders.

However, I wouldn’t want to buy shares as a new investor – the iron ore price is too high. I think a good time to buy miners is when their commodity price is low. For dividends I’d rather buy a dividend share I like with defensive earnings like WHSP (ASX: SOL).

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At the time of publishing, Jaz owns shares of WHSP.

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