Rio Tinto flags rising Pilbara costs, reports $US21.09bn annual profit
Rio Tinto’s Jakob Stausholm has declared a record total dividend payout, but faces substantial cost increases at its flagship WA iron ore operations.
Rio Tinto will reward shareholders with a record total dividend payout worth $23.2bn after booking its highest ever annual profit.
But the miner faces substantial cost increases at its flagship West Australian iron ore operations as the impact of closed borders and rising fuel prices hit capital and operational costs this year.
Rio delivered record financial results on Wednesday, with net profit more than doubling to $US21.09bn ($29bn) for 2021, from the prior year’s $US9.77bn, as commodity prices rebounded.
That has enabled a windfall total dividend record payout of $US10.40 a share, including a final dividend of $US4.17 a share, and another US62c-a-share special dividend.
The company booked underlying earnings of $US21.4bn for the year, marginally behind analyst expectations, with consensus estimates published on the Vuma platform tipping underlying earnings before interest and tax of $US21.63bn.
Chief executive Jakob Stausholm said the company had delivered strong results despite another Covid-19-affected year.
“The recovery of the global economy, driven by industrial production, resulted in significant price strength for our major commodities, which we were able to capture, achieving record financial results with free cashflow of $US17.7bn and underlying earnings of $US21.4bn, after taxes and government royalties of $US13.0bn,” Mr Stausholm said.
As always, Rio’s iron ore operations dominated the company’s earnings, with its Pilbara mines delivering underlying EBIT of $US17.32bn for the year – or about 78 per cent of the total earnings from its global operations. That was up 52 per cent from 2020, after iron ore prices hit record levels in the middle of last year.
However, rising aluminium and copper prices reduced Rio’s reliance on iron ore, with resurgent pricing helping Rio’s copper division to a $US1.58bn profit before interest and tax – more than double that in 2020.
Rio’s aluminium operations were the standout performer, out-earning its copper division with EBIT up 424 per cent for the year at $US2.47bn.
But Rio warned that it faced rising costs across its global operations – particularly in iron ore, where unit cash costs are tipped to rise as much as 13 per cent on 2021 levels, after the company struggled to bring replacement mines online in the Pilbara last year.
It cost Rio an average $US18.60 a tonne to get iron ore out of the ground and onto a ship in 2021, and the company is forecasting average costs of $US19.50-$US21 a tonne in 2022.
Rio also said it was adding an additional 15 per cent to the 2022 budget to bring replacement mines at its Robe Valley and West Angelas hubs online.
“(There is a) potential for capital cost to rise by around 15 per cent due to ongoing Covid-19 restrictions on commissioning and ramp-up of Pilbara growth and brownfield mine replacement projects, including labour access and supply chain quality issues,” Rio said in its annual financial results.
“The latter has been exacerbated by an inability to conduct pre-delivery quality assurance and control at international steel and equipment manufacturers due to limitations on travel.”
Mr Stausholm told The Australian that part of the cost increase in Pilbara operations was due to delays commissioning replacement mines, with the 2022 budget lifted by spending it did not make the previous year.
He said rising diesel costs were also playing a role in Rio’s higher operational cost profile, and Pilbara unit costs would rise as a result of the same project delays.
“We haven’t finalised all our replacement projects, there’s a lot of commissioning still. That puts upwards pressure on costs,” he said.
Rio’s massive profit and dividend payout comes after another difficult year at Rio’s global operations, as Mr Stausholm continued his campaign to set right the company’s global reputation, while fixing long-term problems with its operation performance.
Rio solved its biggest immediate headache in January, getting work on its Oyu Tolgoi copper mine expansion back on track by agreeing to write off the government of Mongolia’s outstanding $US2.4bn debt for its share of construction costs at the mine.
But the company’s Pilbara iron ore division only narrowly beat the bottom end of its revised 2021 iron ore guidance, shipping 321.6 million tonnes from its mines last year.
And Rio issued only cautious optimism for its iron ore performance for the current year, saying it expected to ship 320-335 million tonnes for the year – 5 million tonnes below its initial estimate for 2021, before the skills crisis in WA pushed back the completion of key new Pilbara mines.
That guidance is based on a “business as Covid-normal” basis, factoring in the current skills crisis but not the potential impact to the workforce if the Omicron variant repeats its performance on the east coast and spreads rapidly through the WA workforce.
Its Gudai-Darri mine is nearing the start of operations, although Rio flagged another delay in first shipments last month.
The fresh warnings about the outlook for iron ore come amid a litany of delays and blowouts at key growth projects for the mining giant, with production across all of its key commodity divisions down compared to 2021.
While Rio has solved its immediate problem at Oyu Tolgoi, last month it confirmed an additional $US175m expansion blowout and said its January 2023 deadline for first production from the project – last revised in its September quarter results – was again under revision from the impact of Covid-19 in the country, and broader supply chain issues.
And Rio faces seemingly insurmountable issues at its Jadar lithium project in Serbia, after Serbian Prime Minister Ana Brnabic flagged the cancellation of Rio’s rights to the deposit, a decision that could leave the mining giant’s lithium strategy in tatters.
Mr Stausholm said Rio was still willing to engage with Serbia’s government over the Jadar project, but could not put a time frame on when a final resolution to the impasse may be reached.
Rio Tinto shares closed up $1.30, or 1.2 per cent on Wednesday at $119.80, ahead of the results.