by Chris Becker

Rio Tinto (ASX:RIO) have reported there first half 2017 earnings with a result that has no surprise.

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RIO’s 1HCY17 earnings result was broadly in line with our expectations. Underlying Ebitda of US$9.0bn and underlying earnings of US$3.9bn were within 3% of our forecasts. Net debt declined to US$7.6bn, which was also within 3% of our estimate. The buyback has been boosted by US$1.0bn, which was a positive surprise.

Earnings result broadly in line: RIO reported underlying Ebitda of US$9.0bn, in line with our forecast of US$9.0bn, up 68% YoY and 11% higher than the 2HCY16. Underlying earnings of US$3.9bn were within 3% of our US$4.1bn forecast, up 152% YoY and 11% higher than the 2HCY16. Iron-ore earnings were in line while a better result from Copper & Diamonds was offset by a slightly weaker result in Aluminium.
Operating cash flow in line but capex lower: Operating cash flow of US$6.3bn was within 1% of our forecasts while capex of US$1.8bn was 26% lower than our US$2.4bn estimate. Free cash flow of US$4.6bn was 16% higher than we had expected. The stronger free cash flow drove net debt down to US$7.6bn, 3% better than we had forecast and implies a gearing ratio of 13%.
Capital management boost: The interim dividend of US$1.10/share was 19% lower than we had forecast and implied a 50% payout ratio vs our 60% assumption. However the US$0.5bn buyback, which is nearing completion, has been boosted by a further US$1.0bn. The buyback remains only for the UK listed shares and will be completed by the end of 2017.
Guidance unchanged on capex and productivity: RIO has reiterated its CY17 capex guidance of US$5.0bn with a step up expected in the 2HCY17. Capex guidance for CY18 and CY18 of US$5.5bn is also unchanged although appears the mix of sustaining capex has increased slightly. The US$5.0bn productivity target by 2021 remains unchanged.

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Action and recommendation

Maintain Outperform: RIO’s 1HCY17 earnings result was broadly in line with our expectations. The dividend was slightly weaker than expected but this has been more than offset by a US$1.0bn increase in the UK share buy-back. We expect RIO to return further cash to shareholders later this year once the Coal & Allied sale has been completed

Rio Tinto reports growth in earnings, more buybacks