Rio Tinto has taken the opportunity of a peak in its iron ore-driven profits to clean up its books with a massive $US8.9 billion ($A8.3 billion) write-down in the value of its aluminium business.
Rio paid $US39 billion for aluminium giant, Alcan in mid-2007, at the peak of the previous resources boom, only to find that it paid too much as the GFC hit.
That saw the company forced to the edge of collapse and it escaped falling into Chinese hands by a massive $US15.6 billion rights issue and then the rebound in China’s economy.
That rebound in turn drove iron ore demand sharply higher, dragging prices with it, a development that has consolidated Rio’s finance strength.
Yesterday it revealed record earnings for 2011 of $US15.5 billion, allowing Rio to take the huge write-down against the under-performing aluminium business.
A further $US500 million in other write-offs were also taken by Rio.
The write-down cut earnings to $US5.8 billion ($5.4 billion).
The ability to handle the write-downs and pay a higher dividend came from the core of Rio’s business, the Pilbara iron ore operations.
Rio said its iron ore business had EBITDA of $US20.01 billion, up from $US15.14 billion in 2010.
That’s a gross profit margin of 74.5%, in sales of $US26.8 billion, up from 2010’s very rich 71.8% in sales of $US21.07 billion.
The result comes a day after BHP Billiton revealed first half profits of $US9.94 billion, including record iron ore earnings of $7.9 billion.
Rio’s underlying earnings – excluding the write-down – for the 12 months to December 31 amounted to $US15.5 billion, up from a record $US14 billion in 2010.
Analysts had forecast underlying earnings of $US15.3 billion.
Underlying EBITDA was a record $US28.5 billion, 10% above 2010.
Shareholders will get a dividend of $US1.45 per share, up 34% on 2010’s payout.
Rio shares closed off 16c at $76.00 yesterday ahead of the results which were released an hour after the Australian market closed.
Rio Tinto chief executive Tom Albanese said in yesterday’s statement that he won’t be considered for an annual bonus this year after the company posted a 59% decline in net income.
"As the acquisition of Alcan happened on my watch, I felt it only right not to be considered for an annual bonus," Mr Albanese said in the company’s earnings statement.
Rio said capital spending in 2011 totalled $US12.3 billion in 2011, compared with $US4.6 billion in 2010.
"Total capital expenditure for 2012 on approved projects and sustaining capital is expected to be $16 billion.
"Further project approvals, mainly in the Pilbara, are likely to increase this level of investment as the growth programme continues," Rio said.
On Wednesday of this week Rio confirmed the spending of more than $3.4 billion on the latest phases of its iron ore expansion program in WA’s Pilbara region.
That will see Pilbara iron ore production expanded to 283 million tonnes per annum (Mt/a) and on track to be in operation by end of 2013.
"A second planned phase expansion of Pilbara capacity enhanced to 353 Mt/a and completion brought forward by six months to first half of 2015.
"Growth options enhanced in Mongolia, Mozambique and South Africa: Rio Tinto moves to majority stake in Ivanhoe, completes Riversdale acquisition providing entry to an emerging major coking coal resource and announces doubling of stake in Richards Bay Minerals.
"$7 billion share buy-back programme on track for completion by end of the first quarter.
"To date $6.2 billion has been completed, representing 103 million Rio Tinto plc shares equivalent to five per cent of the Group’s issued share capital."
The share buyback is not being extended.
Chairman Jan du Plessis said, “Rio Tinto performed strongly in 2011, generating another set of record-breaking underlying earnings and cash flow numbers, in a year characterised by increasingly unpredictable markets.
“Whilst we have today reported excellent underlying earnings numbers, we also have to recognise that we have taken a significant impairment charge in relation to our aluminium business, the chairman said.
"As this charge largely relates to the acquisition of Alcan, Tom Albanese and Guy Elliott have notified the Remuneration Committee that they did not wish to be considered for an annual bonus and I think that is absolutely right.
"“We anticipate that uncertainty in the financial markets, particularly around the euro, together with elevated price volatility will continue into 2012. This leads us to remain cautious about near term prospects.
"However, the medium to long term picture remains very positive for metals and minerals as strong demand growth from emerging markets continues.
"This together with the strength of our balance sheet, gives us the confidence to press ahead with our value-adding organic growth programme which has been enhanced in 2011 by the successful execution of a number of targeted acquisitions.
"I am confident that our established strategy of investing in and operating tier one assets positions us well to deliver superior value to shareholders over the long term," he said.
CEO Tom Albanese said Rio Tinto, along with the rest of the mining industry, was feeling the pressure of high-cost inflation on their operations.
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