After 1H15, Rio Tinto Looks Forward to Further Cost Cuts

Rio Tinto (RIO) reported its 1H15 results on August 6. The company held its conference call the same day.

The results were mostly in line with market expectations. Underlying EBITDA (earnings before interest, taxes, depreciation, and amortization) and underlying profits were $7.3 billion and $2.9 billion, respectively.

Within four trading days of its 1H15 results, Rio Tinto’s stock price rose 3%. This is despite a 1.7% fall in benchmark seaborne iron ore prices. Probably the market was happy about its capital expenditure cut announcements and higher cost-out program.

Year-to-date, iron ore mining companies have fallen considerably. RIO has been the most resilient among the iron ore names. Its stock has fallen 12% compared to 13%, 36%, and 54% falls for BHP Billiton (BHP)(BBL), Vale SA (VALE), and Cliffs Natural Resources (CLF), respectively. CLF forms 3.8% of the SPDR S&P Metals and Mining ETF (XME).

In this series, we’ll analyze RIO’s 1H15 earnings. RIO’s management talked about the “New Normal” being the period of economic adjustment where China is transitioning into a developed economy, so the growth rate slows and other developed markets recover. With this broader context in mind, we’ll discuss the management team’s outlook on the business.

Rio Tinto is a British-Australian multinational metals and mining corporation. It’s headquartered in the United Kingdom. It has a dual-listing structure. It includes Rio Tinto PLC—a London- and NYSE-listed company. Rio Tinto’s major products are aluminum, copper, diamonds, gold, industrial metals, iron ore, thermal and metallurgical coal, and uranium. The company is structured in five product segments:

1. Aluminum
2. Copper
3. Diamonds & Minerals
4. Energy
5. Iron Ore

More than 50% of Rio Tinto’s revenue is from iron ore. Iron ore’s contribution toward the company’s underlying earnings is close to 70%. We’ll discuss the performance of these divisions in detail later in this series.