Rio Tinto Takes A Hit On Earnings, But Fundamentals Keep The Stock Going

Michael Teague  |

Less than a month after watching its stock jump almost 4 percent on an impressive production report, the world’s second-largest mining company Rio Tinto Group Plc (RIO) released its quarterly earnings report on Thursday that saw the company taking a substantial hit on earnings.

For the second quarter Rio Tinto reported net income of $1.7 billion and underlying earnings of $4.23 billion, well short of the prior-year period during which the company netted $-- billion on underlying earnings of $5.2 billion. Underlying profit was more or less in line with estimates of $4.16 billion.

Thankfully for Rio, there are some legitimate explanations for the significant year-over-year drop in earnings. Many materials companies are feeling the pinch from slower Chinese growth, and this affects Rio in particular as China is their biggest customer.

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Furthermore, declining prices on the London Metal Exchange have cut profits on all of the company’s commodities reducing earnings by $1.3 billion from the previous year, while Rio weathered a $1.9 billion hit in non-cash exchange losses, as well as a $300 million write-off for a copper mine landslide in Utah.

But the company’s stock jumped over 4 percent to as high as $47.84 in midday trading on Thursday as investors were relatively confident of Rio from the standpoint of fundamentals. Since last year, the company has cut costs by $1.5 billion, and sold off over 20 underperforming assets for $12 billion in an attempt to reduce its sizeable debts. Spending on new projects for 2013 is estimated to come in 20 percent lower than the previous year at $14 billion.

In keeping with the mid-July production report that indicated strong iron ore and copper output, Rio made most of its money during Q2 on the two metals, with iron ore contributing 78 percent of earnings in 2012 and much the same expected for the current year. Not only is the company shedding less valuable assets, it is seeking to expand its iron ore operations , particularly in its Australian Pilbara mine.

[Image: A Rio Tinto Iron Ore mine in Australia, Courtesy of Wikimedia Commons]

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