Recently, Rio Tinto (RTP) announced full-year 2009 results. Net earnings during the period were $4,872 million, 33% up from $3,676 million reported in 2008. The increase was due to the huge amount of net impairment charges deducted in 2008. Earnings per ADR of $3.01 in 2009 were up from $2.86 in the previous year.
Underlying earnings, i.e. earnings excluding the impairment charges, gains from asset disposal, and other items, were down 39% to $6,298 million from $10,303 million in 2008. On a per ADR basis, underlying earnings were $3.57, 46% down from $6.56 in the prior year. The effect of negative price movements on all major commodities in 2009 decreased underlying earnings.
Average copper and aluminum prices were down 28% and 35% year over year, respectively, while average molybdenum prices were down 65%. Although, gold prices were up 11%, diamond prices experienced a downtrend due to the difficult economic conditions.
Consolidated sales during 2009, decreased 30% to $41.825 billion from $54.264 billion in the prior year, driven by weak demand, and lower average realized selling prices for all major commodities.
Although, net operating expense decreased 10% year over year, as a percentage of revenue it has increased by 1200 basis points, which can be the one reason for the decrease in underlying EBITDA during 2009. EBITDA decreased 36% year over year falling to $14,312 billion from $22,317 billion in 2008.
During February 2008, the company planned to make a divestiture valued at $10.3 billion. Out of that Rio has already made a divestiture aggregating $8.8 billion until February 2010. The latest being the sale of Alcan Packaging global Pharmaceuticals, global tobacco, European and Asian food divisions to Amcor for $1,948 million included in the net proceeds of $8.8 billion.
Rio had declared a right issue in July 2009. 21 of New Rio Tinto plc shares and New Rio Tinto Limited shares respectively were offered to shareholders for every 40 shares held in the company. The company raised $14.8 billion through the right issue, which were used to repay debt.
Proceeds of $5.6 billion and $14.8 billion during 2009 through divestiture and right issue respectively, helped halve net debt from $38.7 billion to $18.9 billion at the end of the fiscal year 2009.
Rio Tinto is facing a difficult commodity price environment with a fall in global demand, which is triggering a sharp decline in the prices of most of the group’s principal products. In response, Rio has announced a series of initiatives such as, headcount reduction, capex cuts and asset divestment.
The company aims to reduce its debt and strengthen the balance sheet. Rapid industrialization and urbanization in China will help strengthen the demand for Rio ’s products in future. According to management, China is expected to grow at 9% in 2010. Moreover, the much-awaited joint venture with BHP Billiton to produce iron ore in Australia will definitely enhance the bottom-line in the coming years.
However, we rate RTP’s ADR as Neutral based on uncertain macro economic conditions.
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