Rio Tinto’s profit soars to US$14B
When Rio Tinto Ltd. bought Alcan Inc. in a record-setting US$38-billion deal in 2007, the move was supposed to make aluminum a much bigger part of Rio’s earnings mix.
So far, that has not happened. As Thursday’s earnings report demonstrated, iron ore is delivering the vast majority of Rio’s profit. Other commodities lag far behind.
For 2010, London-based Rio delivered stellar underlying profit of US$14-billion, a record for the company. Rio also cut its debt by US$14.6-billion and unveiled a US$5-billion share buyback program.
Analysts and investors were pleased with all those details. But they also noticed earnings from the iron ore division were US$10.2-billion, or close to 73% of the total. By comparison, the Rio Tinto Alcan division earned just US$773-million, or 5.5% of the overall figure.
“[Rio Tinto Alcan] is a large part of our balance sheet. It has not been a large part of our earnings. So it does have more work to do,” chief executive Tom Albanese said in an interview.
That said, he praised the work of Rio Tinto Alcan’s Montreal management team, which has cut costs dramatically and is modernizing smelters.
He also said while he would like the other commodities to pitch in more to the overall earnings, his goal is just to have high-quality assets that will remain profitable no matter which commodities are hot or cold. Iron ore and copper prices have been on fire since bottoming out in early 2009, while aluminum prices have recovered at a much more modest pace.
“If I look at our history, at different times in the cycle you have different businesses that are seeing particularly strong commodity prices. And I cannot tell you 10 years from now what metals will be in fashion,” he said.
Iron ore has dominated Rio’s earnings for the past few years, but that was not always the case. In 2006, before Rio bought Alcan, iron ore delivered a more modest 31% of the overall profit. Aluminum brought in 10%, or nearly double what it delivered in 2010.
“There’s no getting away from the fact that the vast majority of their profit is provided by iron ore,” said Tony Robson, an analyst at BMO Capital Markets. He added that a large chunk of Rio’s capital spending budget in 2011 is dedicated to iron ore, suggesting the company remains bullish on its prospects.
“They’re putting money into copper and aluminum, but the bulk of the capex for this year is certainly iron ore,” he said.
Mr. Albanese is eager to grow other business units. Rio is building the massive Oyu Tolgoi copper-gold project in Mongolia in a partnership with Canada’s Ivanhoe Mines Ltd. The project was mentioned a whopping 48 times in its earnings release.
Rio is also in the midst of a friendly US$3.9-billion takeover offer for Riversdale Mining Ltd., a deal that would give it coal projects in Mozambique.
Looking ahead, Mr. Albanese said he expects strong demand for commodities to continue in 2011, with global GDP growth of 4% to 5%. But he also warned that global imbalances are a potential threat.
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