Rio Tinto Endures Weak Prices, Write-Downs in 2012, Aims to Lower CapEx to $13 Billion in 2013

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Researched by Industrial Info Resources (Sugar Land, Texas)--Leading international mining group Rio Tinto plc (NYSE:RIO) (London, England) reported lower earnings for 2012, as diminished market prices more than offset improved iron ore production and shipments, as well as a recovery in copper prices in the second half of the year. The company also incurred $14.36 billion in after-tax impairment charges, largely in the aluminium and energy businesses. Rio Tinto reported a net loss of $2.99 billion for the year, compared with net earnings of $5.83 billion in 2011.

Rio Tinto officials stressed that the year's results were noticeably different when excluding the impairment charges, as well as deferred tax asset write-offs; exchange differences; gains and losses on derivatives; and profits and losses from the consolidation and disposal of interests in several businesses. When excluding these factors for both years, the adjusted earnings (called "underlying earnings" by the company) were $9.3 billion, a 40.17% increase from 2011.

Total consolidated sales revenues stood at $50.97 billion, a 15.81% increase from the previous year. Average prices declined for almost all of Rio Tinto's major commodities, although many saw record highs in 2011. Some of the steepest declines were copper, which was down an average of 10%; aluminium, down 16% and molybdenum, down 17%. Among the few that did not drop were gold, borates and titanium dioxide. Other major factors that negatively affected Rio Tinto's bottom line were a labor-related dispute at the company's aluminium smelter in Alma, Quebec, which resulted in a six-month lockout; lower mill throughput at the Kennecott Utah Copper mine, due to higher iron ore hardness; and a major plant shutdown at the Kestrel Mine in Queensland, Australia, which lowered hard coking coal production.

However, Rio Tinto benefited from volume increases throughout the year, especially in the Iron Ore segment, where sales saw gains following increased capacity at the Pilbara ports in Western Australia. Alumina production was 19% higher, a result of major capacity additions to the Yarwun aluminium refinery in Queensland.

Much of Rio Tinto's net loss was attributed to $14.36 billion in after-tax impairment charges, which included $11 billion related to the company's aluminium businesses; $2.86 billion related to Rio Tinto Coal Mozambique; and $460 million related to the group's Argyle diamond mine.

Capital expenditures for the full year stood at $17.46 billion, compared with $12.34 billion in 2011.

Industrial Info is tracking more than $67 billion in planned and active projects involving Rio Tinto, including the $3 billion modernization and expansion of the company's aluminium smelter in Kitimat, British Columbia. The project involves upgrading the 282,000-ton-per-year smelter with Pechiney AP-40 reduction cell technology to increase production capacity up to 420,000 tons per year and reduce emissions by half. Bechtel Group (Montreal, Quebec) is serving as the engineering, procurement and construction contractor.

"These write-downs are deeply disappointing," said Jan du Plessis, the chairman of Rio Tinto, about the asset impairments in a webcast. "In particular, the substantial impairment of our relatively recent Mozambique coal acquisition is unacceptable. There clearly is a need for greater discipline -- in particular in the way we allocate and manage capital."

"The aluminium market deteriorated further in 2012, whilst the Australian and Canadian dollars remained strong," said Guy Elliott, the chief financial officer of Rio Tinto, in the same webcast. "These factors, coupled with high energy and raw material costs, reduced market valuations substantially."

Revenues and earnings declined in all but one of Rio Tinto's major segments:

• The Iron Ore segment reported $24.28 billion in revenues for the year, a 17.63% decrease from 2011, and $9.24 billion in net earnings, a 30.34% decrease.
• The Aluminium segment reported $10.11 billion in revenues for the year, a 16.89% decrease from 2011, and $3 million in net earnings, compared with $442 million in 2011.
• The Copper segment reported $6.66 billion in revenues for the year, a 12.75% decrease from 2011, and $1.09 billion in net earnings, a 43.48% decrease.
• The Energy segment reported $5.78 billion in revenues for the year, a 17.42% decrease from 2011, and $283 million in net earnings, compared with $1.07 billion in 2011.
• The Diamonds and Minerals segment reported $4.06 billion in revenues for the year, an 11% increase from 2011, and $119 million in net earnings, compared with a $162 million net loss in 2011.
• All other segments reported $6.73 billion in total revenues for the year, an 18.38% decrease from 2011, and $528 million in net losses, compared with $120 million in net losses in 2011.

Rio Tinto is targeting a cumulative $5 billion reduction in operating costs by the end of 2014, assuming stable market and operating conditions. Executives hope to reduce capital expenditures to $13 billion for 2013, and they hope to lower exploration and evaluation expenses by $750 million from 2012's $1.97 billion."

"Nearly two thirds of the $5 billion cumulative savings will come from our aluminium and energy businesses," Elliott said in the webcast. "These have experienced the highest cost increases over recent years. Central service and support costs also make up a substantial part of the reduction."

For more information, visit Industrial Info's International Metals and Minerals Project Database.

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