Rio Tinto half-year results: Are the shares reasonable value?

Yesterday, Rio Tinto (ASX: RIO) delivered its first half calendar year 2024 results (1HCY24). The results were largely in line, with an underlying net profit after tax (NPAT) of US$5.75 billion within 1% of consensus estimates and driven predominantly by Rio Tinto’s copper and aluminium divisions. Both net debt and free cash flow were also in line with expectations.

Underlying earnings before interest, taxes, depreciation, and amortisation (EBITDA) of US$12.1 billion missed consensus by about one per cent, as did the underlying NPAT of US$5.75 billion.

The interim dividend of US$1.77/share was about three per cent below consensus, represented a payout ratio of 50% (consensus 51%) and was the same as the first half of 2023 due to expectations of capex increasing up to US$10 billion p.a. in 2024, 2025 and 2026, from $7-8 billion in previous years. The expected capex increase is due to spending on the Simandou iron ore project which is expected to produce 60 million tonnes per annum (mtpa) at full production (Rio Tinto has 42.5% of the project). There was no special dividend as expected.

Copper production is ramping up at Rio Tinto with a better half across all operations and the Oyu Tolgoi project in Mongolia ramping up. As an aside the Oyu Tolgoi area of Mongolia has seen copper smelted since the time of Ghengi Khan. Iron ore results were slightly worse than in 2023 as costs increased on flat production and prices.

There was no change to calendar year 2024 guidance and expectations are that Rio Tinto will deliver two per cent growth in copper equivalent production in 2024. The company is guiding to three per cent per annum compound growth from 2024 to 2028 from existing operations and projects.

Much of the recent press has focused on a collapse of the dual-listed structure. Given the scale of the Pilbara iron ore business, one might question whether a single UK listing would be relevant. Meanwhile collapsing the structure to a single ASX listing could result in additional tax liabilities associated with the company’s partial ownership of the Escondida project in Chile, the aforementioned Simandou project in Guinea and the Oyu Tolgoi project in Mongolia.

Speculation in the press has also centred on mergers and acquisitions, and while Rio Tinto has previously indicated some reluctance towards large-scale transactions, the company today indicated that with a debt-to-equity ratio at historically low levels of around eight per cent, and with projects such as Mongolia’s copper mine and Argentina’s Rincon lithium project approaching milestones, the company could be looking for more copper and lithium acquisitions with “synergies” either from a combination of adjacent assets or shared infrastructure.

CEO Jakob Stausholm was quoted by the press as stating, “I couldn’t care less about what the lithium price is in the next 12 months, I’m more thinking about how will the market and demand be over the next decade or two, and lithium is necessary in almost any construct of a battery.”

With growth in copper and iron ore production, we currently believe Rio Tinto shares are reasonable value at 11x earnings and a 5.7% fully franked dividend yield.