Rio Tinto’s record profit masks challenges to growth outlook

The world’s top iron-ore producer reaped annual underlying earnings of $21.4 billion, according to a company statement.
Image: Chris J. Ratcliffe/Bloomberg

Rio Tinto Group posted record profit for 2021 on strong demand for iron ore from China. Repeating the result may prove difficult, as it grapples with an uncertain demand outlook, rising cost pressures, and challenges to its growth projects.

The world’s top iron-ore producer reaped annual underlying earnings of $21.4 billion, according to a company statement Wednesday, surging 73% from the prior year and broadly in line with a median estimate. Rio will reward shareholders with a final dividend totaling $6.7 billion and, despite the immediate headwinds, is buoyant about its long-term prospects.

“We have a portfolio that is well positioned, and are targeting disciplined investment in commodities that will see strong demand in the coming decades,” said Jakob Stausholm, Rio’s chief executive officer, in a statement. “Our agenda is an ambitious, multi-year journey which we are determined to deliver.”

Iron ore prices have been volatile, swinging from historic highs above $230 per ton in May only to retreat to the mid $80s in the second half of the year as China reined in the output of its steel makers to meet stricter environmental standards. The market has since rallied, touching $150 earlier this year after monetary easing and relaxed climate targets raised expectations for robust Chinese steel output in the year ahead.

Even so, Rio’s outlook remains tied to policy moves in Beijing, with the authorities keen to keep ore price gains in check, while the company also faces headwinds from growing cost pressures and increased investor scrutiny of its management of environmental, social and governance issues.

The London-based miner expects the cost of production at its Pilbara iron ore operations in a range of $19.50-$21 per ton in 2022, compared to $18.60 per ton the prior year. It forecast capital expenditure of about $8 billion in 2022, rising to a range of $9 billion to $10 billion in 2023 and 2024.

Rio’s bid to diversify its business to gain more exposure to metals poised to benefit from the green-energy transition faces challenges.

The Serbian government in January blocked Rio’s plans to build Europe’s biggest lithium mine following opposition to the development among the local community; on Wednesday, the company said it was reviewing the legal basis of Serbia’s decision.

The company has also been hit with delays and cost overruns at its $6.9 billion copper expansion project at Oyu Tolgoi. In January, Rio agreed a deal with the Mongolian government to waive debt owed by the state in order to move the project forward.

Meanwhile, investors are keeping an eye on Rio’s efforts to improve workplace culture after an independent report commissioned by the company and published earlier this month found evidence of widespread sexual harassment, racism and bullying.

Rio’s shares fell 12% in 2021, compared to a 2% dip for its main rival BHP Group, but have jumped nearly 20% so far this year. It’s dividend of $4.17 a share, plus a special return of $1 billion, means the total payout to shareholders equates to 79% of underlying earnings.

© 2022 Bloomberg

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