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These Factors Hit Rio Tinto’s Earnings Most

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Nov. 20 2020, Updated 12:30 p.m. ET

Factors affecting Rio Tinto’s estimates

Rio Tinto (RIO) (TRQ) returned to profitability in 2016 after experiencing a difficult 2015. The company is now trying to sustain its margins in a low commodity price environment and aims to reduce its debt by as much as $2.5 billion.

Rio Tinto has also been focusing on shareholder returns. Its CEO (chief executive officer) mentioned that the company will sustain last year’s cash return of $2.7 billion—even if iron ore prices drop to near-record lows of $42 per ton.

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Revenue projections for Rio Tinto

Analysts are projecting 2017 sales of $39.7 billion for Rio Tinto (RIO), which would reflect a growth of 17.5% YoY (year-over-year). Sales estimates for 2018 and 2019 imply rises of -18.8% and -1%, respectively. While the analysts’ estimates for the current year have higher iron ore prices baked in, the weaker price outlook going forward is to blame for the company’s declining sales expectations for the next two years.

RIO’s revenue projections for 2017 have seen a downward revision of 1% in the past month.

Rio Tinto’s earnings estimates

While Rio’s revenues imply a YoY growth of 17.5%, its EBITDA (earnings before interest, tax, depreciation, and amortization) reflects a far higher growth of 47% to $18.2 billion in 2017, mainly because of lower unit cost expectations and other cost reductions identified by the company.

Rio Tinto’s EBITDA margin was 36.7% in 2016, but the margin is expected to rise to 46% in 2017, according to analysts’ estimates. The margins are expected to taper down to 41% and 40.2% for 2018 and 2019, respectively.

Commodity prices (COMT)—especially iron ore prices—have seen renewed pressure for the past couple of months due to higher inventories and the stimulus situation in China. This development is also putting pressure on other seaborne iron ore miners like BHP Billiton (BHP) and Vale (VALE).

In the next part, we’ll take a closer look at Vale.

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