Rio Tinto Plc - 2019 half year results

Rio Tinto chief executive J-S Jacques said "We have delivered strong financial results with underlying EBITDA of $10.3 billion and EBITDA margin of 47%. Our financial performance was driven by our Pilbara operations with a 72% EBITDA margin, underpinned by strong iron ore prices.

"We are taking actions to protect the Pilbara Blend and optimise performance across our iron ore system, following the operational challenges which emerged in the first half.

 

"Our world-class portfolio and strong balance sheet serve us well in all market conditions. This, together with our disciplined capital allocation, underpins our ability to continue to invest in our business and deliver superior returns to shareholders in the short, medium and long term. Our delivery is in evidence today, with our record interim returns of $3.5 billion."

Six months to 30 June

2019

2018

Change

Net cash generated from operating activities (US$ millions)*

6,389

 

5,228

 

22

%

Capital expenditure1 (US$ millions)

2,391

 

2,363

 

1

%

Free cash flow2 (US$ millions)

3,879

 

2,883

 

35

%

Underlying EBITDA3 (US$ millions)

10,250

 

9,198

 

11

%

Underlying earnings3 (US$ millions)

4,932

 

4,416

 

12

%

Net earnings (US$ millions)

4,130

 

4,380

 

(6

)%

Underlying earnings3 per share (US cents)

301.5

 

253.6

 

19

%

Basic earnings per share (US cents)

252.5

 

251.6

 

-

Ordinary dividend per share (US cents)

151.0

127.0

 

19

%

 

 

 

 

 

At 30 June 2019

At 31 Dec 2018

 

Net (debt)/cash4 (US$ millions)

(4,855

)

255

 

 

Net gearing ratio5

10%

(1

)%

Return on Capital Employed (ROCE)6

23%

19

%

 

*2019 first half operating cash flow of $6,389m is shown net of $856m of tax paid on the 2018 coking coal disposals. See page 3 for other footnotes.

• Sustained improvement in safety performance, with the All Injury Frequency Rate continuing to decline, a reduction in the severity rate and fewer process safety incidents.

• Underlying EBITDA3 of $10.3 billion (excluding the contribution from the coking coal assets divested in 2018),  was 19% above 2018 first half, with an EBITDA margin7 of 47%.

• Operating cash flow of $6.4 billion is presented net of $0.9 billion of tax paid in 2019 first half relating to the 2018 coking coal disposals.

• Free cash flow2 of $3.9 billion was 35% higher than 2018 first half.

• Cash returns of $3.5 billion announced today, comprising record interim ordinary dividend of $2.5 billion, equivalent to 151 US cents per share, and special dividend of $1.0 billion, equivalent to 61 US cents per share.

• $4.9 billion underlying earnings3, 12% higher due to a strong contribution from Iron Ore.

• Following our update on the Oyu Tolgoi underground project on 16 July 2019, we completed an impairment assessment and concluded that the changes to project cost and schedule led to an impairment charge, net of tax and non-controlling interests, of $0.8 billion. The impairment is reflected in net earnings of $4.1 billion9.

• Record 23% Return on Capital Employed6, a rise of four percentage points on 2018.

• Strong balance sheet with net debt5 of $4.9 billion, mainly reflects $7.8 billion of cash returns to shareholders paid in 2019 first half, partly offset by free cash flow.

 

The financial results are prepared in accordance with IFRS and are unaudited. Footnotes are set out on page 3.

Stronger revenues and EBITDA

• Consolidated sales revenue of $20.7 billion was 9% higher than 2018 first half, excluding the $0.8 billion contribution from the coking coal assets divested in 2018. Higher iron ore prices offset the impact of lower volumes and lower aluminium prices.

• Underlying EBITDA3 of $10.3 billion was 19% higher than 2018 first half, excluding the $0.6 billion contribution from coking coal. This increase reflected higher iron ore prices which more than compensated for lower volumes and higher costs.

• Effective tax rate on underlying earnings3 was 31%, three percentage points higher than in 2018 first half, primarily reflecting increased profits in Australia.

• Net earnings of $4.1 billion, 6% lower than 2018 first half, mainly reflected the impairment of Oyu Tolgoi. See table on page 8.

 

Strong cash flow from operations

 

First half 2019
US$m

First half 2018

US$m7

Net cash generated from operating activities*

6,389

 

5,228

 

Capital expenditure1

(2,391

)

(2,363

)

Sales of property, plant and equipment

17

 

18

 

Lease principal payments

(136

)

-

Free cash flow2

3,879

 

2,883

 

Disposals

46

 

402

 

Dividends paid to equity shareholders

(6,843

)

(3,177

)

Share buy-back

(988

)

(1,501

)

Non-cash impact from implementation of  IFRS 16 Leases at 1 January 2019

(1,248

)

-

Other

44

 

9

 

Increase in net debt4

(5,110

)

(1,384

)

*2019 first half operating cash flow of $6,389m is shown net of $856m of tax on the 2018 coking coal disposals. See page 3 for other footnotes.

• Cash generated from operating activities of $6.4 billion, net of $0.9 billion of tax relating to the 2018 coking coal disposals. The 22% increase was driven primarily by higher underlying EBITDA. Effective management of working capital helped to reduce the impact from higher prices.

• Capital expenditure1 was $2.4 billion, of which $1.2 billion was on development projects and $1.2 billion to sustain capacity at our operations.

• Free cash flow2 of $3.9 billion, up 35%, due to the higher operating cash flow and stable capex.

• $6.8 billion of dividends reflected the 2018 final dividend and the special dividend paid in April 2019.

• $1.0 billion of share buy-backs in Rio Tinto plc shares repurchased.

• Implementation of IFRS 16 Leases on 1 January 2019 increased net debt by $1.2 billion.

• As a result of the above, net debt4 increased by $5.1 billion to $4.9 billion since 2018 year end.

 

Continued investment in growth projects and development

• At the Oyu Tolgoi underground copper/gold mine in Mongolia, Definitive Estimate10 for development capital spend and timeline now anticipated in the second half of 2020. See page 20.

• $2.6 billion Koodaideri replacement iron ore mine progressed, with engineering, procurement and construction activities on schedule. Koodaideri will have a 43 Mt annual capacity, underpinning production of our Pilbara Blend™, with first tonnes in late 2021 and significant potential for future expansion with a phase 2 study underway.

• $463 million investment in the Zulti South project at Richards Bay Minerals (RBM) in South Africa approved in 2019 first half, to sustain RBM's current capacity and extend mine life.

• $287 million spend on exploration and evaluation, a 24% rise, mostly driven by increased activity at the Resolution copper project in Arizona and higher greenfield expenditure to underpin future growth projects. In April we committed $302 million ($166 million our share) of future expenditure to advance Resolution.

• Further encouraging drill results at the Winu project in Western Australia with 42 new drill holes and 11 rigs on site.11

 

Guidance

• In 2019 we expect the run-rate from our mine-to-market programme8 to be around $0.5 billion, despite weather impacts. This reflects operational challenges experienced in the Pilbara, which reduced our 2019 first half run-rate to $0.2 billion. We now expect our mine-to-market productivity programme to deliver an additional free cash flow run-rate of $1.0-1.5 billion (previously $1.5 billion) from 2021. Delivery is based on the assumption that we increase iron ore volumes, subject to market conditions, and that raw material prices revert to those at the beginning of the programme in 2017, mainly in Aluminium.

• Capital expenditure1 expected to be around $6.0 billion in 2019 and around $6.5 billion in 2020 and 2021. Each year includes sustaining capex, which we now expect to be around $2.5 billion per year (previously $2.0-2.5 billion per year).

• Effective tax rate on underlying earnings of approximately 30% in 2019.

• Pilbara unit cash costs of $14-15 per wet metric tonne (excluding freight) in 2019.

• C1 unit costs at Rio Tinto Kennecott, Oyu Tolgoi and Escondida to average 110-120 US cents per pound in 2019.

• 2019 production guidance is unchanged from our Second Quarter Operations Review.

 

1   Capital expenditure is presented gross, before taking into account any cash received from disposals of property, plant and equipment (PP&E).

The following financial performance indicators - which are non-GAAP measures - are those management uses internally to assess performance. They are therefore considered relevant to readers of this document. They are presented here to give more clarity around the underlying business performance of the Group's operations.

2   Free cash flow is defined as net cash generated from operating activities less purchases of PP&E less lease principal payments plus sales of PP&E.

3   Net and underlying earnings relate to profit attributable to the owners of Rio Tinto. Underlying EBITDA and earnings are defined on

page 13. Underlying earnings is reconciled to net earnings on page 72.

4   Net cash / debt is defined and reconciled to the balance sheet on page 49.

5   Net gearing ratio is defined as net debt divided by the sum of net debt and total equity at the end of each period.

6   Return on Capital Employed (ROCE) is defined as annualised underlying earnings excluding net interest divided by average capital employed (operating assets before net debt).

7   EBITDA margin is defined as Group underlying EBITDA divided by Product Group total revenues.

8   Mine-to-market productivity improvements refer to the additional free cash flow generated from post-tax operating cash cost improvements and post-tax volume gains from productivity programmes.

 

9   Refer to page 44 for pre-tax analysis of impairment charge.

10 Refer to market release on 16 July 2019 "Update on Oyu Tolgoi underground project".

11  For full details, see the Notice to the ASX dated 1 August 2019 ("Rio Tinto Exploration Update - Winu project") and accompanying information provided in accordance with the Table 1 checklist in The Australasian Code for the Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code, 2012 Edition). These materials are also available on riotinto.com.

Underlying EBITDA, underlying earnings by product group

 

First half
2019
US$m

First half
2018
US$m

Change
%

Underlying EBITDA

 

 

 

Iron Ore

7,552

 

5,685

 

33

%

Aluminium

1,127

 

1,831

 

(38

)%

Copper & Diamonds

1,213

 

1,360

 

(11

)%

Energy & Minerals

954

 

1,008

 

(5

)%

Other operations

(88

)

(27

)

(226

)%

Product group total

10,758

 

9,857

 

9

%

Central pension costs, share-based payments and insurance

77

 

(83

)

193

%

Restructuring, project and one-off costs

(175

)

(177

)

1

%

Other central costs

(272

)

(299

)

9

%

Exploration and evaluation

(138

)

(100

)

(38

)%

Total

10,250

 

9,198

 

11

%

Underlying earnings

 

 

 

Iron Ore

4,506

 

3,231

 

39

%

Aluminium

315

 

871

 

(64

)%

Copper & Diamonds

348

 

450

 

(23

)%

Energy & Minerals

341

 

464

 

(27

)%

Other operations

(80

)

(67

)

(19

)%

Product group total

5,430

 

4,949

 

10

%

Central pension costs, share-based payments and insurance

77

 

(54

)

243

%

Restructuring, project and one-off costs

(119

)

(39

)

(205

)%

Other central costs

(258

)

(236

)

(9

)%

Exploration and evaluation

(109

)

(86

)

(27

)%

Net interest

(89

)

(118

)

25

%

Total

4,932

 

4,416

 

12

%

Underlying EBITDA is a key financial indicator which management uses internally to assess performance. It excludes the same items that are excluded in arriving at underlying earnings. See page 11 for further detail and a reconciliation to profit on ordinary activities before finance items and tax.

Pre-tax Central pension costs, share-based payments and insurance were a $77 million credit compared with an $83 million charge in 2018 first half due to lower business unit captive insurance premiums held centrally.

 

Restructuring, project and one-off central costs were in line with 2018 first half, on a pre-tax basis.

 

Other central costs of $272 million (pre-tax) were 9% lower than 2018 first half due to efficiency gains.