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How Does Rio Tinto’s Balance Sheet Position It for the Future?

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Financial strength

A strong balance sheet with low financial leverage is best for a market environment characterized by volatile commodity prices. It provides protection against volatility, the 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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Balance sheet strength

RIO’s net debt at the end of 1H16 was $12.9 billion, $0.9 billion lower than its debt level at the end of December 2015. This was despite the company’s payment of dividends amounting to $1.9 billion during the period.

The company had $8.3 billion in cash at the end of June 2016, compared to $9.4 billion at the end of December 31, 2015. The fall was mainly due to its repayment of debt.

Financial leverage

RIO currently has a net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple of 1.5x. In comparison, BHP Billiton (BHP) and Vale (VALE) have multiples of 2.0x and 2.3x, respectively.

RIO’s net debt was 23% at the end of June 2016. This was at the lower end of RIO’s management’s targeted leverage ratio of 20%–30% through the cycle. In 1H16, the company reduced its debt by $6 billion, completing a bond buyback for $4.5 billion and retiring another $1.5 billion.

$4.3 billion was drawn mainly from the Oyu Tolgoi project’s financing.

Overall, RIO’s balance sheet remains strong, and a dividend reset and capital expenditure cuts have provided the company with additional flexibility to navigate the current downturn.

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.

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