Rio’s Short-term Weakness Creates an Interesting Opportunity
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Miner Rio Tinto (NYSE: RIO) reported better than expected first half results Wednesday. Revenue fell 13% to $25.3 billion in the first half of 2012. Underlying profit tumbled 34% to $5.2 billion, which was stronger than the Street forecasted. Additionally, the firm increased its first half interim dividend to $0.725 per share, 34% higher than its dividend for the same period last year. Rio Tinto also generated over $7.8 billion in operating cash flow, which is down substantially from the previous year, but still quite strong for a weak global economy.
Revenue fell in every geographic segment as global metal prices remained weak. Revenue in the US fell 20% to $3.6 billion, and revenue in China, Rio’s largest geographic region by far, fell 7% year-over-year to $8.5 billion. Sales in Europe, excluding the United Kingdom, tumbled 14% to $3.2 billion. Needless to say, revenue losses could moderate in China and the US, but revenues in Europe should continue to be weak.
Iron ore production increased 4% to 120.3 million tons. However, prices fell 20% year-over-year, causing revenue in the segment to fall 9% to $12.5 billion. Underlying earnings fell 20% to $4.7 billion. The firm expects production of 250 million tonnes from operations in Canada and Australia. The miner invested heavily in iron ore infrastructure during the first half of the year, as the firm expects to account for 25% of additional global iron ore production. Management previously mentioned their optimistic outlook on Chinese and Indian demand.
Mined copper production and refined copper fell by 8% and 33%, respectively, to 252.9 thousand tonnes and 123.4 thousand tonnes. Copper prices were about 14% lower year-over-year. As a result, the segment’s revenue fell 22% to $3.2 billion and underlying profit fell 55% to $556 million. The firm expects copper production and refined copper to total 580 thousand tons and 300 thousand tons, respectively. Again, copper demand is tied heavily to China, and the recent slowdown in the region likely curtailed results. Freeport McMoran (NYSE: FCX) has struggled tremendously with weak copper demand. Much like Rio, Freeport's copper production fell 8%, but expects the long-term demand story to remain intact.
Coal production and demand was reasonably strong, as coal production across all types increased. Uranium production also accelerated 54% to 3.7 million pounds. Revenue in the segment fell only 4% to $2.8 billion, as demand for coal remains strong in Japan, Taiwan and Korea. The firm expects production to accelerate modestly in the second half of the year and is optimistic about long-term growth as a result of strong demand from India and China. Unlike domestic coal firm's like James River Coal (NASDAQ: JRCC), which struggles with weak US demand dynamics as well as liquidity, Rio is adequately capitalized and exposed to the "right" markets.
Rio also announced that it wants to divest its aluminum and diamond assets, and it will consider a spin-off if necessary. We like the firm’s continued investment in productivity and efficiency, even though we think the short-term picture is very uncertain. Earnings could suffer in the second half of 2012 as global demand and pricing remains weak. Though the firm scores a 6 on our Valuentum Buying Index, we think shares are incredibly cheap at current levels. The miner is well positioned to take advantage of growing urbanization in the long-run, and its current valuation is too cheap to ignore. A dividend yield that could be in excess of 2.8% for the year also provides a nice cushion while the global economy returns to health. As a result, we hold shares in our Best Ideas Newsletter portfolio.
Valuentum holds shares of Rio Tinto in their Best Ideas Newsletter. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.