Rio Tinto, the world's second-largest miner, is poised for a comeback after posting a record drop in half-year profit and selling off shares and assets to slash debt.
First-half underlying earnings slumped 54 per cent, in line with market forecasts, as metals prices and demand collapsed, and Rio slid to a loss in its aluminium business, which it expanded two years ago with an ill-timed takeover of Alcan.
But Rio said it was more confident about the future after cutting 16,000 jobs, or 15 per cent of its workforce, which was more than it targeted last December, cutting production at its higher cost operations and paying off nearly 40 per cent of its debt.
“The worst is definitely over, just from where their debt position has come from and where it is today ... and where commodity prices have moved,” said Tim Schroeders, a portfolio manager with Pengana Capital.
“The group has a lot more flexibility in being able to adjust to whatever market conditions confront it in the future.”
Rio Tinto, which has eased its debt woes with recent asset sales and a $15.2 billion share sale, forecast that cost cuts would pay off in the second half and, in a sign of its confidence, said it expected to pay a final dividend this year.
“Rio Tinto is now a stronger, fitter business and we can now look to the future with a higher level of confidence,” Chief Executive Tom Albanese told reporters.
However it was cautious about a recent rally in metals prices.
“If current markets are any indication, I expect to see more stable and possibly stronger trading conditions in the second half," Albanese said.
That echoed the outlook given last week by bigger rival and former suitor BHP Billiton after a slump in metals prices triggered its first profit decline in seven years.
Analysts said then that BHP was the low risk alternative for investors looking to take a position in the diversified mining sector given its strong balance sheet, ability to raise its dividend and its commodity and geographical diversification.
Following the Rio Tinto results, Mark Taylor, senior resources analyst at Morningstar, said Rio looked a better bet based on its current share price.
“Rio Tinto is much cheaper than BHP at the moment, the shares are at a much greater discount to valuations. I would probably recommend Rio at the moment just because of the greater share price discount,” he said.
Reuters