Stock of the Day – Rio Tinto (RIO)

The world's no. 2 miner slashed costs and cut capital spending quicker than expected, and boosted shipments of iron ore by a fifth, which helped it offset a 29 percent slump in prices of the steelmaking ingredient this year. Strong cash flows allowed Rio to cut net debt to $16.1 billion, putting it in line with a mid-teens range it wanted to hit before it would consider returning capital to shareholders. That boosted expectations for a share buyback in February, when it announces full-year results.


RIO underlying earnings (Source – Company Reports)
 
We were impressed the company was able to boost profit and cut net debt by $2 billion even as revenue fell slightly, and have high expectations for fat returns to shareholders in February. Reversing years of huge spending on acquisitions and new mines, Walsh, 18 months in the top job, is on track to meet a pledge to cut costs, sell assets and slash debt in order to reward investors with big returns even as commodity prices cool.


Chinese GDP Growth (Source – Company Reports)

Walsh has focused on ramping up production from its iron ore mines in Australia's Pilbara, flooding the market with low-cost, high-quality iron ore that has weighed on prices and hurt smaller producers. Rio said it expects supply of 125 million tonnes of high-cost iron ore to be taken out of the market in 2014 as lower-grade producers cut output. Underlying earnings rose to $5.12 billion in the six months to June, up from $4.23 billion a year earlier.


RIO Daily Chart (Source – Thomson Reuters)
Profit from iron ore, which made up 92 percent of underlying earnings, rose 10 percent to $4.68 billion, while copper earnings rocketed 71 percent to $594 million. Its long-suffering aluminium business reported a 74 percent rise to $373 million. Rio managed to cut a further $929 million in costs in the first half, six months ahead of schedule, adding to $2.3 billion in costs cut last year, and flagged it would be able to pare a further $1 billion by the end of 2015. It also cut its forecast for capital spending in 2014 to $9 billion from an earlier estimate of $11 billion. Guinea's Simandou, another main project for Rio, is expected to start production in Dec. 2018 but the miner said a final decision will only be made after a feasibility study next year. The miner signalled it does not intend to take part in a tender for the rights to develop two blocks of Simandou near the ones it already owns a stake in. We put a BUY recommendation on the stocks at the current price of $66.32.

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