A strong balance sheet with low financial leverage is suited for a market environment characterized by falling commodity prices, such as the current environment. It provides protection against volatility, flexibility to take advantage of accretive opportunities, and protection to shareholders. In this context, we’ll see how Rio Tinto’s (RIO) balance sheet and financial leverage look.
Balance sheet strength
- RIO’s net debt increased from $12.5 billion at the end of 2014 to $13.7 billion at the end of June 2015. Some of the increase is due to the payment of dividends and share buybacks, as we discussed above. BHP Billiton’s (BHP)(BBL) net debt, on the other hand, decreased by $1.4 billion to $24.4 billion as of June 30, 2015.
- The company had $11.2 billion of cash at the end of June 30, 2015. However, the cash balance reduced in July, following the early repurchase of $1.2 billion in bonds, which were due to mature in 2016. Management also mentioned that a further $500 million of bonds is maturing later this year, which it expects to repay with cash.
- RIO currently has a leverage ratio, or net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization), of 1.2x. This compares to 1.3x for BHP and 2.0x for Vale SA (VALE).
- RIO’s leverage, or net debt/(net debt + Equity) was 21% at the end of 1H15. This is at the bottom of management’s targeted leverage ratio of 20%–30% through the cycle.
The SPDR S&P Metals and Mining ETF (XME) also invests in some of these stocks. CLF forms 3.8% of the fund’s holdings. The SPDR S&P Natural Resources ETF (GNR) also invests in some of these stocks. Rio Tinto forms 1.8% of its holdings.