Broker view: Why Rio Tinto shares are a ‘buy’ despite the group enduring a full year loss of $866m

11th February 2016

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As Rio Tinto reports its full year results, and a loss of $866m, Helal Miah, investment research analyst at The Share Centre, explains why he is still calling its shares a ‘buy’…

Dire conditions on the commodity markets have led Rio Tinto to report a full year loss of $866m from a profit of $6.5bn the previous year, despite production increases in its full year results this morning.

However excluding impairments, write-downs and derivatives losses, investors should acknowledge that an underlying profit of $4.5bn was made.

Iron ore, by far its biggest source of earnings, faced another year of price declines accounting for the biggest hit to the group’s profitability.

The company has been cutting back on capital expenditure, stripping costs and reducing debt in recent years to wade through the commodities downturn and there are plans to carry on with similar measures in 2016 and 2017.

In terms of numbers, the group plan on cutting costs by a further $1bn in 2016 and 2017, and capex expenditure cuts of $4bn and $5bn, respectively.

With net cash flows of $9.4bn, Rio Tinto can still manage to pay the full year dividend of 215 cents per share.

However, management said it will scrap the progressing dividend policy and take a more flexible approach. Investors should note that we believe this is the right and conservative approach when market conditions are challenging.

Compared to its peer group, we believe Rio Tinto is better positioned to ride out the commodities downturn with some of the lowest cost of production due to economies of scale.

As a result, we continue to recommend the company as a ‘buy’ albeit for those investors willing to accept a higher level of risk and taking a contrarian approach and hoping for a longer term recovery in the commodities sector.

 

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