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Where next for Rio Tinto shares after solid full-year results?

Rio Tinto delivered mixed full-year results as volumes rose and revenue fell. Where next?

rio tinto Source: Bloomberg

Like most miners, Rio Tinto remains subject to the whims of the commodity supercycle.

The volatile ASX stock has risen by 38% over the past five years to $124.87 but is essentially flat over the past year. Of course, investors must also consider the substantial dividend payouts in this period, but the major has also fallen by 8.6% year-to-date, reflecting mixed full-year results and uncertainty over the trajectory of Chinese economic growth.

Rio Tinto shares: full-year results

Rio saw full-year revenue fall by 3% year-over-year to $54 billion, though production grew by 3% due to ‘focused investment’ in the health of the business. However, underlying EBITA fell by 9% to $23.9 billion, roughly matching analyst expectations. Accordingly, the full-year dividend fell by 12% to $4.35 — though this represents a 60% payout ratio, at the top of the guided range.

Net cash generated from operating activities came in at $15.2 billion, leaving profit after tax (net earnings) of $10.1 billion after including the impact of $700 million in net impairment charges.

While higher volumes helped offset lower commodity prices (especially in aluminium) and rising costs, iron ore expenditure is expected to continue rising through 2024 due to inflation and work on the mines. However, higher copper volumes should see costs fall. Importantly, net debt remains stable at $4.2 billion, though free cash flow fell by some 15% to $7.7 billion.

CEO Jakob Stausholm notes that ‘We are making clear progress as we shape Rio Tinto into a stronger and even more reliable company. By focusing on our four objectives, we are building a portfolio that is fit for the future - including our Oyu Tolgoi underground copper mine in Mongolia and the Simandou iron ore project in Guinea…we will continue paying attractive dividends and investing in the long-term strength of our business.’

Where next for Rio Tinto shares?

Rio Tinto — like Fortescue — is mostly dependent on iron ore prices, with iron ore accounting for more than 80% of underlying cash profit in 2023. While iron has fallen sharply since 2021, increased volumes have offset the lower prices, especially as Rio’s Gudai-Darri mine ramps up. Indeed, Rio remains the world’s largest iron ore producer.

Of course, iron prices are arguably dictated by Chinese demand, and the country’s economic direction remains difficult to predict. For context, the communist country’s official manufacturing purchasing managers’ index fell to 49.1 for February, slipping from 49.2 in January. A reading below 50 signifies a contraction compared to the previous month.

On the other hand, Rio has committed to spending billions on developing the Simandou iron ore project in Guinea, safeguarding future revenues. The asset is arguably the largest undeveloped iron deposit in the world, and this matters in a world where new large-scale mines are becoming much harder to find.

And positively — while Rio Tinto still expects some Pilbara production cost increases in 2024 — CFO Peter Cunningham has noted that costs are finally starting to ‘moderate.’ He also enthused that even with the capital expenditure rising, ‘the reality is we remain in a very strong financial position and can afford to undertake our growth agenda and continue to pay out at 60%.’

It’s also worth noting the recent merger and acquisition activity in the space. With only $4.2 billion in net debt, speculation remains that Rio could look for some opportunities as asset prices remain depressed.

Stausholm did note in August 2023 that he would consider small, bolt-on acquisitions, but that at the time valuations were too high. Given many operators in several commodities are struggling to run profitably, this may be an area to watch.

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