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How Does Rio Tinto’s Financial Leverage Look?

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Jun. 12 2016, Updated 7:05 p.m. ET

Financial strength

A strong balance sheet with low financial leverage is best for a Market environment characterized by a volatile commodity prices (COMT), such as the current environment. It provides protection against volatility, flexibility to take advantage of accretive opportunities, and protection to shareholders. In this article, we’ll analyze how Rio Tinto’s (RIO) balance sheet and financial leverage look.

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Strengthening balance sheet

RIO’s net debt at the end of 2015 was $13.8 billion, which was $700 million lower than its pro forma position at the end of 2014. The company had $9.4 billion of cash at the end of December 2015 as compared to $11.2 billion at the end of June 30, 2015. The decline was mainly due to the repayment of debt. In 2H15, RIO purchased bonds worth $1.2 billion, which were due to mature in 2016. The company also repaid $500 million in maturing bonds over the course of 2015. Rio Tinto is continuing with these measures of paying down its gross debt in 2016 to further strengthen its balance sheet.

Financial leverage

RIO has a leverage ratio, or net debt–to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio, of 1.5x. In comparison, BHP Billiton and Vale (VALE) have ratios of 2.0x and 2.3x, respectively. RIO’s leverage, or net debt divided by the sum of net debt and equity, was 24% at the end of 2015. This is near the midpoint of management’s targeted leverage ratio of 20%–30% through the cycle. Overall, RIO’s balance sheet remains strong, and its dividend reset and capex cuts have provided the company with additional flexibility to navigate the current downturn.

The SPDR S&P Metals and Mining ETF (XME) invests in some of these mining stocks. Cliffs Natural Resources (CLF) makes up 3.8% of the fund’s holdings. The SPDR S&P Global Natural Resources ETF (GNR) also invests in some of these stocks. Rio Tinto forms 1.8% of GNR’s holdings.

In the next part of this series, we’ll see how analysts rate Rio Tinto’s stock.

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