Rio Tinto delivers special dividend as iron ore cash flows
Rio Tinto’s aluminium smelters in Gladstone and Newcastle are ‘on thin ice’ because of energy prices.
Rio Tinto’s aluminium smelters in Gladstone and Newcastle are “on thin ice” and face an uncertain future if Canberra does not act on the east coast energy cost crisis, according to Rio boss Jean-Sebastien Jacques.
As Rio delivered another $US3.5 billion ($5.1bn) in dividends to shareholders on the back of the soaring iron ore price, Mr Jacques added his voice to the chorus of criticism of Australia’s energy policy.
He said Rio was in talks with state and federal governments, and utility providers, over a solution for rising energy costs at its aluminium smelters but confirmed the operations and their 2000 strong workforce could be closed if a solution is not found for energy prices.
Mr Jacques would not be drawn on the details of the talks, but said high energy costs were rendering them uncompetitive in a tough market for the commodity.
“What we want is a globally sourced and competitive energy, to make sure our premium aluminium business in Australian remains competitive,” he said.
“We’re not asking for anything special. But I’m looking at it from the outside and saying ‘Hang on, Australia is full of resources, it should be a place where energy is pretty cheap in a global landscape’ — and that is not the case today.”
His comments came as the global mining giant rode the soaring iron ore prices to deliver a bumper return to shareholders, declaring a $US1bn special dividend to return some of the cash pouring into its coffers.
Rio delivered its half-year results Thursday, offering up an interim dividend of $US1.51 a share, below analyst consensus estimates of $US1.78.
But the company said it would also return an additional $US1bn to shareholders through a US61c a share special dividend.
The company booked a first-half profit of $US10.25bn before interest, tax, depreciation and amortisation, with after-tax earnings of $US4.1bn and an underlying after-tax profit of $US4.9bn.
Rio Tinto has been among the key beneficiaries of the surge in iron ore prices this year, following a tailings dam collapse that prompted the closure of a large chunk of Brazil’s iron ore industry.
The benchmark price of iron ore has climbed from $US70 a tonne at the start of the year to $US117 today, peaking at more than $US125 a tonne, pricing the steelmaking ingredient at levels not seen since early 2014.
But the mining giant has had challenges of its own in its iron ore division this year. It has twice cut its production guidance, firstly after Tropical Cyclone Veronica and a fire at its Cape Lambert port disrupted operations and secondly after it experienced “mine operational challenges” at its Greater Brockman hub, forcing it to ship lower grade ore from the Pilbara mine.
Rio Tinto’s iron ore division generated underlying earnings of $US7.5bn (EBITDA), up 33 per cent from 2018 — and delivered an underlying EBITDA margin of 72 per cent.
Rising wage and fuel costs in the division were partially offset by the impact of the falling Australian dollar, and Mr Jacques said Rio will also spend about $80m fixing the problems at Brockman, bringing in new fleet to move waste rock in order to help access higher grade ore.
“Clearly it is not acceptable. But we are dealing with it, we are spending about $80m in the coming six months in order to bring the situation back under control,” he said.
The company expects the iron ore business to deliver between 320 and 330 million tonnes this year at a cash cost of $US14-$US15 per tonne.
Rio’s half-year results were also marred by a massive writedown of its Oyu Tolgoi mine in Mongolia.
Rio booked an $US800m writedown on the asset, the day after minority partner in the mine, Turquoise Hill Resources, recorded a $US596.9m impairment in its own financial results, released overnight.
Rio said the value of the asset had been slashed by $US2.2bn in total.
But while Rio remains committed to the development of the Mongolian mine, its Australian aluminium assets are “on thin ice”.
High energy costs mean Rio’s Pacific Aluminium division is again bleeding cash, slumping to a $54m underlying loss for the first, from a $151m profit in the first six months of 2018.
“There is work in progress to make sure those assets remain competitive, and to remain competitive it is very important to be profitable because we need to invest in those assets,” Mr Jacques said.
“But at this point in time, it is a very, very challenging situation.”
Rio’s Pacific Aluminium business includes the Boyne aluminium smelter near Gladstone, which it operates, and a major share in the Tomago smelter in Newcastle. It also includes the Bell Bay operations in Tasmania, which are not believed to be under threat.
Mr Jacques said Australia was risking its industrial base if it did not find a solution to energy costs.
“It would be a real pity if we had to restructure those assets. There could be a slowdown, it could be mothballing some of the lines,” he said.
“And, to the extreme, if we couldn’t see a way forward in the long term, closure could be considered. But let me be clear, we are not there yet, far away from that — but we are in active discussions with a series of stakeholders in order to find a sustainable solution for those assets.”
“But are we on very thin ice? Yes, we are.”
Rio’s Australian-traded shares closed down $1.09 at $97.81, ahead of the results release Thursday. Its London-listed stock was down 2.8 per cent in early trading amid a sell-off of mining shares.
