Global miner Rio Tinto Plc (RIO) has reported outstanding results for fiscal 2010. Net earnings attributable to ADR holders of Rio Tinto during the period were $13,987 million, more than double of $6,298 million reported in fiscal 2009.

The increase was due to the upward movement in the prices of commodities buttressed by lower cost, higher volume, and a slight improvement in the global economy, which increased the demand for rough diamonds. Earnings per ADR were $7.13, up from $3.57 recorded in the previous year and $7.11 according to the Zacks Consensus Estimate.

Average copper and molybdenum prices increased 47% and 45%, respectively and average aluminum prices went up by 31%. Gold prices also moved up by 26%. Partially, the price increase was attributable to the new pricing system.

Consolidated sales during 2010, moved up by 35.3% to $56,576 million from $41,825 million in the prior year, driven by higher average realized selling prices for all major commodities coupled with higher volume. It beat the Zacks Consensus Estimate of $55,963 million.

Net operating expense based on revenues decreased to 65.9% from 79.7% recorded in fiscal 2009. Operating margin improved to 34.1% from 20.3% in the same period of the previous year. EBITDA grew to $25,978 million from $14,312 million in 2009.

Rio generated $18,277 million in operating cash flows compared with $9,212 million in 2009 based on higher prices. In 2010, Rio Tinto earned $3.8 billion from divestment of subsidiaries, joint ventures & associates as well as disposal of assets held for sale.  

Increased cash flows helped decrease net debt and the company reported a net cash of $4,284 million in fiscal 2010 compared to $18,861 million in fiscal 2009.

In December, Rio Tinto formed a couple of agreements. The first was with the Australia-based Riversdale Mining Limited to acquire all of the issued and outstanding shares of the latter at an offer price of A$16 per share bringing the total consideration at A$3.9 billion. Rio Tinto decided to use its cash reserves and credit facilities to fund the transaction.

The second agreement pertains to Rio Tinto pricing 25.6 million shares of Cloud Peak Energy Inc.‘s (CLD) offered under the secondary public at $19.50 each aggregating $499.2 million. On completion, Rio Tinto will have a 6.2% stake in the latter.

At present, Rio Tinto has also queued up a massive investment plan. This includes $800 million for completion of the underground block cave project at the Argyle Diamond Mine in Australia, $1.6 billion investment for development of the Hope Downs 4 iron ore project, expected to be operational by 2013 with an annual capacity of 15 million tons, a $563 million MoU with Aluminum Corporation of China Limited, or Chinalco (ACH) for the development and operation of the Simandou iron ore project in Guinea, etc.

With its long-life, low-cost assets and a strong pipeline of attractive growth projects, Rio Tinto has assets that can generate positive cash flow under difficult market conditions.

Though commodity demand from China and other emerging economies has slowed in the last couple of months, management is confident that industrialization and urbanization will continue in these markets, thereby strengthening the demand for Rio’s products.

Chinais expected to grow by approximately 10% in fiscal 2011. China’s steel consumption is expected to increase 3.5% in fiscal 2011.China is expected to remain the largest consumer of metals in the years to come. Hence, the medium-term outlook for metal commodities remains encouraging.

Management expects the global demand for its key products such as iron ore, copper and aluminum to double by 2022, primarily driven by China, India and the emerging markets bloc. Rio Tinto’s investment in various growth projects will enable it to capitalize on the long-term demand. Hence, we maintain our Outperform recommendation on the ADR. The ADR currently retains its Zacks #3 Rank (short term Hold rating).

 
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