Reporting Season

3 brokers run the ruler on Rio Tinto's 12% profit drop and unexpectedly strong dividend

Thu 22 Feb 24, 12:18pm (AEST)
Rio Oyu Tolgoi
Source: Rio Tinto's Oyu Tolgoi (Source: Getty Images)

Key Points

  • Rio Tinto's 2023 full-year results showed resilience despite lower commodity prices, with strong cash generation and solid production
  • CEO Stausholm highlighted progress in shaping Rio Tinto, focusing on key objectives like the Oyu Tolgoi project in Mongolia and Simandou in Guinea
  • Most brokers remain Buy rated on Rio, highlighting the stronger-than-expected dividend and its impressive short-to-medium term growth pipeline

Rio Tinto (ASX: RIO) reported a resilient full-year 2023 result and a better-than-expected final dividend, showcasing strong cash generation, solid production across the portfolio and inflation tailwinds.

Rio saw lower prices for its key commodities as supply improvements outpaced modest demand growth. The movements in commodity prices resulted in a US$1.5 billion decline in underlying EBITDA compared to 2022. Some of this weakness was offset by higher sales volumes across the portfolio, notably iron ore and copper.

"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," said Chief Executive Jakob Stausholm.

2023 Full Year Results – Key numbers

  • Revenue down 3% to US$54.0 billion, beat US$53.8 billion consensus

  • Underlying EBITDA down 9% to US$23.89 billion, beat US$23.55 billion consensus

  • Underlying earnings down 11.9% to US$11.9 billion, beat US$11.6 billion consensus

  • Final dividend of US$4.35 per share

  • Net debt of US$4.23 billion, above US$3.06 billion consensus

Earnings Call Highlights

Here are some of the key highlights from Rio Tinto's conference call, courtesy of Morgan Stanley.

  • Cost pressures, notably labour, continue across Australia, Canada, and the US. However, cost pressures have started to moderate and the company expects more moderation in inflationary pressures going forward.

  • Lithium M&A? Rio Tinto remains focused on the quality of the ore body and it has attractive options organically via Rincon (and maybe Jadar). Lithium prices are back to where they were before the “bubble” and the commodity has very attractive LT fundamentals, but this alone is not enough to underpin an increased M&A drive.

  • Oyu Tolgoi infrastructure continues to progress in line with the company’s plans.

  • Projects and resourcing. The company continues to favour partnerships to share risks and pool resources. Simandou and La Granja are examples of this approach.

  • Pacific Aluminium cost competitiveness is highly dependent on the extent to which the business has access to low-cost energy prices and this is contingent on the Australian government’s initiatives.

  • Jadar progress. Rio Tinto CEO met with the Serbian president but more work needs to be done with the government (post-new government formation) to progress the project.

Brokers Run The Ruler

Citi: Rio Tinto's full-year result was largely in line with Citi estimates. Some of the weak points included a softer-than-expected EBITDA and higher-than-expected debt. The final dividend of US$4.35 per share was 7% ahead of Citi estimates. A BUY rating was retained with a $139.00 target price.

Macquarie: Rio reported in-line EBITDA and earnings and the final dividend was a 5% beat on consensus. The company's US$4.2 billion of net debt and US$10.5 billion of cash highlights "what a strong position Rio is in to maintain dividends, fund its growth program and potentially explore counter-cyclical M&A." The analysts view 2024 as an inflection year for Rio as it continues to deliver on its growth strategy and ramping up projects. Though, a NEUTRAL rating was retained with a $120.00 target price.

Goldman Sachs: "RIO continues to believe they are option rich and have the best exploration pipeline in years, perhaps decades. We believe RIO is focused on creating value for shareholders through early-stage exploration rather than large M&A." the analyst said. A BUY rating was retained with a $138.3 target price (down from $140.5). The Buy thesis is centered around Rio's compelling relative valuation to BHP and Fortescue, its attractive free cash flow and strong production growth in FY24-25.

2024-02-22 11 48 39-RIO Tinto Ltd (ASX RIO) Share Price - Market Index
Rio Tinto 12-month price chart (Source: Market Index)

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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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