Rio Tinto Brushes Off Weak Prices for Shiny Profits in 2014, Lowers 2015 Capex to $7 Billion

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Researched by Industrial Info Resources (Sugar Land, Texas)--Leading international mining group Rio Tinto plc (NYSE:RIO) (London, England) reported strong earnings growth for 2014, despite sharp drops in iron ore and other commodity prices. The company attributed the gains to intensive cost-cutting and stronger sales volumes. Net earnings for the year were reported to be $6.53 billion, compared with $3.67 billion in 2013.

Industrial Info is tracking about $45.5 billion in active projects involving Rio Tinto, including the $3 billion modernization and expansion of the company's aluminum smelter in Kitimat, British Columbia. The project will upgrade the smelter with Pechiney AP-40 Reduction Cell Technology to increase production capacity from 282,000 to 420,000 tons per year and reduce emissions 50%. Commissioning is expected toward the middle of the year.

Consolidated sales revenues stood at $47.66 billion, a 6.85% decrease from the same period last year. Much of the revenue decline was attributed to tumbling commodity prices: iron ore prices nearly halved between January and December 2014, while thermal and metallurgical coal prices hit five- and seven-year lows, respectively. Copper prices also declined significantly. Aluminum was a rare exception, with prices strengthening as demand increased and capacity held steady.

Rio Tinto maintained a strong bottom line by reducing costs and strengthening volumes, hitting production records for iron ore and thermal coal sourced from New South Wales' Hunter Valley. Sales volumes records for iron ore were achieved through capacity gains at the Pilbara ports and mines in Western Australia. The company's copper, aluminum and bauxite segments also saw strong operational results, with copper benefiting from improvements at Kennecott Utah Copper Corporation, a Rio Tinto subsidiary in Utah, and the Oyi Tolgoi mine in Mongolia's Gobi Desert.

Capital expenditures for 2014 were reported to be $8.16 billion, compared with $13 billion in 2013. The reduction reflects Rio Tinto's completion of several high-value projects during the year, as well as reduced spending.

"In tough conditions, we successfully marketed our products and operated at capacity when demand was there," said Chris Lynch, the director and chief financial officer of Rio Tinto, in a conference call. "We beat our cost reduction and capex targets, and the reduction in working capital has been outstanding."

He later added: "Our continued focus on costs has delivered an incremental $1.5 billion of savings, leading to an overall reduction of $4.8 billion versus 2012."

Rio Tinto executives expect capital expenditures to fall to less than $7 billion this year, and to stay at about $7 billion in both 2016 and 2017. They expect economic growth to be slow and steady in 2015, with tight margins across the global Metals & Minerals Industry. Generally low oil prices are expected to remain beneficial.

"Compelling growth will require around $4.5 billion per year, all on strong returning projects," Lynch said. "Not all of this has been approved at this stage, but that is our expectation. We have no further need for debt reduction in 2015, as we are at the bottom of our target gearing range."

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