The need-to-know from Rio Tinto’s 2022 full year results (and what three brokers think)

Rio Tinto (ASX: RIO) released its full year report for the 2022 calendar year on Wednesday, and analysts at investment banks have been busily absorbing the information. 

Rio Tinto beat analyst expectations on its dividend (US$4.92/share) despite fall in the underlying EBITDA to US$26.3 billion.

• Rio Tinto’s net cash decreased by US$5.8 billion compared to 2021. 

• Net debt has also risen to US$4.2 billion. 

What are the drivers behind that?

Some of the key reasons for the earnings drop include:

• Net cash generated from operations is down -36% year-on-year (YoY) 

• Elevated prices for raw materials in RIO’s aluminium inventory led to a US$500 million rise in working capital 

• RIO’s tax payments were higher relative to 2021 due to a A$1.1 billion payment to the Australian Taxation Office (ATO) regarding its 2021 profits 

• RIO also paid an $600 million settlement with the ATO, “in respect of 12 historical years” 

• RIO acquired Rincon during CY22 for US$8 billion

• US$3 billion spent on non-controlling-interests to move to a 66% shareholding of the Mongolian Oyu Tolgoi copper-gold mine—”our largest growth project”

• CAPEX spend was US$6.8 billion (including US$100 million on decarbonisation)

• CAPEX guidance is higher for CY23 at US$8 billion—set to hit US$9.5 billion in CY24-CY25

• RIO paid US$11.7 billion in dividends in 2022 

CEO commentary

"We are building a stronger Rio Tinto,” CEO Jakob Stausholm said, highlighting the company’s second-half records at its Pilbara iron ore mine and rail system, along with the doubling of its stake at Oyu Tolgoi. 

“We are also investing for the future…progressing the Rincon Lithium Project in Argentina and reaching milestone agreements that underpin the long-term success of our Pilbara iron ore business,” Stausholm added. 

“Despite challenging market conditions, we remain resilient because of the quality of our assets, our great people and the strength of our balance sheet.”

All in all, a mixed story. 

So what do the brokers think? Let’s take a look where Citigroup, Goldman Sachs, and Macquarie Research stand. 

Citigroup 

Despite Citi analysts writing “in our view, RIO seems to be getting its mojo back,” the investment bank is the most bearish on the company of the three brokers. 

Citigroup has given Rio Tinto a price target of $120.00 with a NEUTRAL rating.

Using a closing price of $125.51, this reflects a -4.4% return.

As at 1:40pm (AEST) Thursday 23 February 2023, Rio Tinto’s share price is $122.73—still above Citi’s target. 

“It was a more confident analyst presentation, with RIO seeing improvements in its key WA iron ore business and, as the Oyu Tolgo underground development is back on track, now sees itself as a growth company,” Citi analysts wrote. 

“Capex guidance is fine-tuned to US$8bn (from US$8-9bn) for CY23 with growth capex of around $2 billion. In CY24-25 capex rises to $9-10 billion including an ambition for growth capex to be up to $3 billion pa.” 

“Guidance implies YoY increases in iron ore and copper unit costs on a largely flat production profile. CY23 effective tax rate of around 30%.”

Macquarie Research 

As for where each stands on Rio Tinto’s future near-to-mid-term performance, Macquarie is in the middle-range of the three brokers covered in this article. 

Macquarie has given Rio Tinto a price target of $122.00 with a NEUTRAL rating.

This target sits in line with Rio Tinto’s share price on Thursday of $122.73. 

“We make only modest changes to our earnings forecasts after incorporating the CY22 result, with our EPS increasing by 1% for CY23 and beyond,” Macquarie Research analysts wrote. 

“Movements in iron ore, aluminium, and copper prices present the most significant upside and downside risks to our earnings forecasts and valuation.”

“RIO’s CY22 result was mixed, with in-line underlying Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) and earnings offset by weaker cash flow generation…Iron ore accounted for 80% of underlying earnings for the year. A spot price scenario generates 35% and 47% higher earnings than our base case for RIO for CY23 and CY24 and translates to free cash flow yields of 11% and 14%.”

Goldman Sachs 

Goldman Sachs was the most bullish of the three brokers covered in this article, rating RIO as a BUY. 

They aren’t alone: Market Index’s broker consensus scan shows no less than ten brokers also rate RIO as a BUY (with that said, nine also rate it as a HOLD and 3 say SELL). 

Goldman Sachs has given Rio Tinto a price target of $131.70.

Using a share price of $125.51, this reflects a total return of 4.9%.

While Goldman Sachs has brought down its price target for RIO from $132.00, the PT of $131.70 is still over $11.00 higher than that of Citigroup’s. 

“Guidance for 2023 is unchanged for production ([internal estimates suggest] +8% YoY in Copper equivalent terms) and costs although RIO has flagged ongoing lagged inflation,” Goldman Sachs analysts wrote. 

“Iron ore EBITDA was in-line with [our estimates], minerals performed strongly, but the aluminium division was below estimates on higher than expected costs.”

“RIO outlined a doubling in copper growth to 1Mtpa by 2030 (GSe 1Mtpa) with 80% of this Oyu Tolgoi, and then potentially further to 1.3Mtpa beyond 2030. OT has commenced production with the ramp-up to begin when the conveyor decline is completed in early 2024.”

Rio Tinto's one year charts at close on Thursday