Rio Tinto achieves achieving record financial results with underlying earnings of $21.4 billion

profit

Rio Tinto plc (LON:RIO) has announced its final results.

Rio Tinto Chief Executive Jakob Stausholm said: “Our people have continued to safely run our world-class assets and are working hard to improve our operational performance, despite challenging operating conditions from prolonged COVID-19 disruptions. The recovery of the global economy, driven by industrial production, resulted in significant price strength for our major commodities, which we were able to capture, achieving record financial results with free cash flow of $17.7 billion and underlying earnings of $21.4 billion, after taxes and government royalties of $13.0 billion. This enables us to pay our highest total dividend ever of 1,040 US cents per share, including a 247 US cents per share special dividend, representing a 79% payout.

“With the launch of our new strategy, we have set a new direction for Rio Tinto to thrive in a decarbonising world. We have a portfolio that is well positioned, and are targeting disciplined investment in commodities that will see strong demand in the coming decades. Our agenda is an ambitious, multi-year journey which we are determined to deliver and we have already taken the first steps, with underground operations under way following the Oyu Tolgoi agreement and a binding agreement to acquire the Rincon lithium project in Argentina. We continue to evolve and deepen the way we engage and interact with all stakeholders as we work hard to generate and strengthen relationships wherever we operate. Our actions will ensure we continue to deliver attractive returns to shareholders, invest in sustaining and growing our portfolio, and make a broader contribution to society, particularly in relation to the drive to net-zero carbon emissions.”

At year end          2021             2020   Change
Net cash generated from operating activities (US$ millions)       25,345          15,875        60    %
Purchases of property, plant and equipment and intangible assets (US$ millions)         7,384            6,189        19    %
Free cash flow1 (US$ millions)       17,664            9,407        88    %
Consolidated sales revenue (US$ millions)       63,495          44,611        42    %
Underlying EBITDA1 (US$ millions)       37,720          23,902        58    %
Profit after tax attributable to owners of Rio Tinto (net earnings) (US$ millions)       21,094            9,769          116   %
Underlying earnings per share1 (EPS)  (US cents)         1,321               770        72    %
Ordinary dividend per share (US cents)         793.0            464.0        71   %
Special dividend per share (US cents)         247.0              93.0          166   %
Total dividend per share (US cents)      1,040.0            557.0        87   %
Net cash / (debt)1 (US$ millions)         1,576              (664)   
Underlying return on capital employed (ROCE)1     44   %     27   % 

1 This financial performance indicator is a non-GAAP alternative performance measure (“APM”). It is used internally by management to assess the performance of the business and is therefore considered relevant to readers of this document. It is presented here to give more clarity around the underlying business performance of the Group’s operations. APMs are reconciled to directly comparable IFRS financial measures on pages 78 to 86. Our financial results are prepared in accordance with International Financial Reporting Standards (IFRS) – see page 43 for further information. Footnotes are set out in full on page 8.

•  Safety continues to be our first priority: our managed operations were fatality-free for a third successive year. The all-injury frequency rate deteriorated slightly to 0.40: fatigue, labour shortages and other pressures from COVID-19 have heightened the safety risk in day-to-day operations and we recognise that there is no room for complacency.

•  On 1 February 2022, we published a comprehensive external review of our workplace culture, commissioned as part of our commitment to ensure sustained cultural change across our global operations. The review is part of the work being undertaken by our Everyday Respect task force, which was launched in March 2021 to better understand, prevent and respond to harmful behaviours in the workplace. We will implement all recommendations from the report.

•  We continue to focus on rebuilding our relationships with Traditional Owners across our global operations. In September we published an interim report on our Communities and Social Performance commitments showing our progress. At the end of 2021, the relationship between the Puutu Kunti Kurrama and Pinikura (PKKP) leadership and Rio Tinto Iron Ore is constructive and considered. An agreement on a co-management of Country approach and appropriate remedy for the destruction of Juukan Gorge is substantially progressed.

•  On 14 February 2022, we announced an agreement with the Yinhawangka Aboriginal Corporation on a new co-designed management plan to ensure the protection of significant social and cultural heritage values as part of our proposed development of the Western Range iron ore project in the Pilbara region of Western Australia. The Social, Cultural Heritage Management Plan is the result of strong collaboration over the past year between the Yinhawangka people and Rio Tinto including “on-Country” visits, archaeological and ethnographic surveys and workshops. As a result, the mine has been designed to reduce impacts on social and cultural heritage values. We submitted the plan to Western Australia’s Environmental Protection Authority on 1 February 2022, as part of our submission regarding the Greater Paraburdoo Iron Ore Hub Proposal.

•  In October, we unveiled a longer term strategy to ensure we thrive in a decarbonising world, while continuing to pay attractive dividends, in line with our shareholder returns policy. To achieve this, we will accelerate our own decarbonisation, grow in materials enabling the global energy transition and develop products and services that help our customers to decarbonise, through our key enablers of becoming best operator, excelling in development, achieving an impeccable ESG performance and strengthening our social licence to operate.

• To deliver our strategy, we set a new target to reduce our Scope 1 and 2 carbon emissions by 50% by 2030, more than tripling our previous target, and are bringing forward our 15% reduction in emissions to 2025 (previously 2030), supported by an estimated $7.5 billion of direct investments between 2022 and 2030. These projects deliver a range of economic outcomes but in aggregate are value accretive at a very modest carbon price. Most importantly, they safeguard the integrity of our assets over the longer term and reduce the risk profile of our cash flows. We are accelerating our activity in the Pilbara and expanding our tenure for potential wind and solar sites.

•  Following the comprehensive agreement announced on 25 January 2022, underground operations are now under way at the Oyu Tolgoi copper/gold project in Mongolia. The agreement will move the project forward, reset the relationship between the partners and unlock the most valuable part of the mine, with first sustainable production expected in the first half of 2023.

•  In line with our rigorous approach to capital allocation, we made significant progress with our Battery Minerals portfolio in 2021, signing a binding agreement to acquire the Rincon lithium project in Argentina. We also committed funding for the Jadar lithium-borates project in Serbia, subject to receiving all relevant approvals, permits and licences. In January 2022, the Government of Serbia cancelled the Spatial Plan for the Jadar project and required all related permits to be revoked. We are disappointed by this announcement and are committed to exploring all options and are reviewing the legal basis of the decision and the implications for our activities and people in Serbia.

•  To achieve our ambition of becoming the best operator, we initiated the Rio Tinto Safe Production System at five pilot sites in 2021, focusing on sustainably unlocking capacity. We are already seeing returns, including a significant improvement at the Kennecott concentrator since deployment in July. We are planning a more extensive programme in 2022, subject to COVID-19 constraints, with up to 30 deployments at 15 sites and up to 80 rapid improvement projects, targeting bottlenecks.

Key financial highlights

•  $25.3 billion net cash generated from operating activities was 60% higher than 2020 driven by higher prices. This flowed through to 88% higher free cash flow1 of $17.7 billion, which included a 19% rise in capital expenditure to $7.4 billion.

•  $21.1 billion of net earnings, 116% higher than 2020, reflected the higher prices, the impact of closure provision increases at Energy Resources of Australia (ERA) and other non-operating sites, $0.5 billion of exchange and derivative gains and $0.2 billion of impairments2. Effective tax rate on net earnings of 27.7% compared with 33.1% in 2020.

•  $37.7 billion underlying EBITDA1 was 58% above 2020, with an underlying EBITDA margin1 of 57%.

•  $21.4 billion underlying earnings1 (underlying EPS1 of 1,321.1 US cents) were 72% above 2020 with a 28.0% effective tax rate on underlying earnings1, compared with 29.5% in 2020.

•  $1.6 billion of net cash1 at year end, compared with net debt1 of $0.7 billion at the start of the year, reflected the free cash flow1 of $17.7 billion, partly offset by $15.4 billion of cash returns to shareholders.

•  $16.8 billion full-year dividend, equivalent to 1,040 US cents per share and 79% of underlying earnings, includes $6.7 billion record final ordinary dividend (417 US cents per share) and $1.0 billion final special dividend (62 US cents per share) declared today.

$16.8 billion* of dividends declared for 2021: payout ratio averages 74% over past six years

Ordinary dividendUS$ billionUS centsper share
Interim ordinary dividend paid in September 2021                6.1376
Final ordinary dividend to be paid in April 2022                6.7417
Full-year ordinary dividend represents 60% payout              12.8793
Additional returns  
Special dividend paid in September 2021                3.0185
Special dividend to be paid in April 2022                1.062
Combined total is 79% of 2021 underlying earnings              16.81,040

* Based on weighted average number of shares and declared dividends per share for the respective periods excluding foreign exchange impacts on payment.

Strong cash flow from operations

              2021             2020
 US$mUS$m
Net cash generated from operating activities          25,345          15,875
Purchases of property, plant and equipment and intangible assets           (7,384)           (6,189)
Sales of property, plant and equipment                 61                 45
Lease principal payments              (358)              (324)
Free cash flow1          17,664            9,407
Disposals                   4                 10
Dividends paid to equity shareholders         (15,357)           (6,132)
Share buy-backs                  –              (208)
Other                (71)                (90)
Decrease in net debt1            2,240            2,987

Footnotes are set out on page 8.

•  $25.3 billion in net cash generated from operating activities, 60% higher than 2020, primarily driven  by higher prices for our major commodities, which also led to an increase in dividends received from equity accounted units and paid to joint venture partners. It is net of an increase in taxes and royalties paid in line with higher profits and a rise in working capital, primarily due to higher iron ore portside inventories following higher volumes of SP10 and constrained availability of high-grade blending stocks in the fourth quarter.

•  $7.4 billion capital expenditure was comprised of $0.6 billion of growth capital, $3.3 billion of replacement capital and $3.5 billion of sustaining capital. In 2021, we funded our capital expenditure from operating activities and expect to continue funding our capital programme from internal sources, except for the Oyu Tolgoi underground development, which is currently project-financed.

•  $15.4 billion of dividends paid in 2021 was comprised of the 2020 final paid in April 2021 ($6.4 billion) and the 2021 interim paid in September ($9.0 billion, including foreign exchange impacts).

•  As a result of the above, net debt1 improved by $2.2 billion in 2021, ending the year with net cash1 of $1.6 billion.

Guidance

•  We expect capital expenditure to be around $8.0 billion in 2022, which considers potential increases of around 15% for the Pilbara replacement projects. In each of 2023 and 2024, we expect capital expenditure to be between $9.0 and $10.0 billion, which includes the ambition to invest up to $3.0 billion in growth per year, depending on opportunities. Each year also includes sustaining capital of around $3.5 billion, of which around $1.5 billion a year is for Pilbara iron ore, subject to ongoing inflationary pressure. Around half of our capital expenditure is denominated in Australian dollars. In addition, our guidance includes around $1.5 billion over the next three years on decarbonisation projects, mainly relating to repowering the Pilbara: this will accelerate from 2025, bringing our best estimate to around $7.5 billion, in aggregate from 2022 to 2030.

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•  Effective tax rate on underlying earnings of ~30% in 2022. In June 2022, we expect to make a US$1.1 billion* final payment to the Australian Taxation Office in respect of 2021 corporate profits.    * Based on the 2021 year-end Australian dollar exchange rate of 0.73.

2022 unit cost guidance2021 Actuals2022 Guidance
Pilbara iron ore unit cash costs, free on board (FOB) basis – US$ per wet metric tonne1                           18.619.5-21.0
Australian dollar exchange rate                           0.75                           0.75
Copper C1 unit costs (average for Kennecott, Oyu Tolgoi and Escondida) – US cents per lb                              82130-150

Excludes COVID-19 costs (defined below) of $0.5 per tonne in 2021.

• In 2022, we expect Pilbara iron ore unit cash costs to increase to $19.5-21.0 per tonne. Guidance reflects rising input prices and labour costs, an increased mining work index and higher mine processing plant maintenance, partially offset by the ramp-up of Gudai-Darri and continued efficiency improvements. Unit costs are stated at an Australian dollar exchange rate of 0.75 and exclude any additional COVID-19 response costs.

• In 2022, we expect copper C1 unit costs to rise due to lower by-product credits, as a result of mining areas with lower gold volumes at Oyu Tolgoi and lower molybdenum grades at Kennecott and rising input costs, partially offset by higher refined copper production at Kennecott.

2022 production guidance (Rio Tinto share, unless otherwise stated)2021 Actuals2022 Guidance
Pilbara iron ore (shipments, 100% basis) (Mt)                                322320 to 335
Bauxite (Mt)                                  5454 to 57
Alumina (Mt)                                 7.98.0 to 8.4
Aluminium (Mt)                                 3.23.1 to 3.2
Mined copper (kt)                                494500 to 575
Refined copper (kt)                                202230 to 290
Diamonds2 (M carats)                                 3.85.0 to 6.0
Titanium dioxide slag (Mt)                                 1.01.1 to 1.4
Iron Ore Company of Canada pellets and concentrate (Mt)                                 9.710.0 to 11.0
Boric oxide equivalent (Mt)                                 0.5~0.5

Reflects 100% ownership of Diavik (previously 60%) from 1 November 2021.

•  Production guidance is unchanged from our Fourth Quarter Operations Review released on 18 January 2022.

•  Iron ore shipments and bauxite production guidance remain subject to weather and market conditions.

•  Our cost and volume guidance assumes development of the pandemic does not lead to further government-imposed restrictions or an increase in cases and/or severity, which could result in a significant number of our production-critical workforce and contractor base being unable to work due to illness and/or isolation requirements. This risk extends to prolonged interruption of service from a key partner or supplier which could lead to severely constrained operational activity of a key asset or project. This risk is exacerbated globally by tight labour markets, localised inflation and supply chain delays.

•  Pilbara shipments guidance remains subject to commissioning and ramp-up of new mines and management of cultural heritage, including any impacts from the Aboriginal Cultural Heritage Act 2021. We support the strengthening of Aboriginal heritage protection in Western Australia and continue to engage with Traditional Owners regarding current and proposed plans for mining activities, adjusting mine plans where required. Given the quality of our resource, we retain a range of development options in the Pilbara, subject to heritage and environmental approvals.

•  There have been no material changes to the estimates of Pilbara Ore Reserves from those reported in our 2020 Annual Report released to the Australian Securities Exchange on 22 February 2021.  However, during 2021 there has been some depletion in reserves, including a further 46 million dry tonnes due to protection of heritage sites, primarily from Gudai-Darri. This is in addition to the 54 million dry tonne reduction due to heritage considerations in Ore Reserves in 2020.

•  COVID-19 costs include incremental travel costs (such as chartering aircraft in the event of the withdrawal of commercial alternatives), incremental logistical costs from disruption of normal arrangements, the cost of leasing alternative office accommodation, medical treatment and repatriation costs for stranded travellers and expatriates, the cost of deep cleaning affected locations, incremental costs arising from the shutdown of facilities (such as security, care & maintenance costs), increased overtime and temporary contractor costs to cover sickness, the incremental cost of alternative procurement where normal supply chains are broken and critical items are sourced elsewhere and increased spend on IT infrastructure and capacity to support remote working.

Our projects and development options

•  We increased our exploration and evaluation spend by 16% to $726 million in 2021, as we advanced our evaluation projects, progressed our greenfield exploration programmes and unlocked new opportunities.

•  Commissioning and ramp-up of Pilbara growth and brownfield mine replacement projects has been impacted by ongoing COVID-19 restrictions, including labour access and supply chain quality issues. The latter have been exacerbated by an inability to conduct pre-delivery quality assurance and control at international steel and equipment manufacturers due to limitations on travel.

◦      The $2.6 billion3 Gudai-Darri greenfield iron ore mine in Western Australia is advancing. The first train was loaded from the mobile crushing and screening facilities in December and first production from the main plant is expected in the second quarter of 2022, subject to the continuing impacts of COVID-19. This first phase of Gudai-Darri, with a 43 million tonne annual capacity, will replace depleting orebodies and provide some incremental capacity.

◦      The $0.9 billion3 (Rio Tinto share) investment in the Robe River Joint Venture replacement iron ore mines is progressing. First ore at West Angelas (C and D deposits) was achieved in June and are now fully commissioned. First ore at Robe Valley (Mesa B, C, H) was achieved in August. Ongoing Mesa A wet plant construction and commissioning challenges have impacted production ramp-up. New wet plant components are on order and production will operate at a reduced capacity until repairs are completed.

◦      The $0.8 billion3 Western Turner Syncline phase 2 mine, which will also replace existing iron ore production, achieved first ore in October, following commissioning of the autonomous mining truck fleet. Some residual brownfield plant works are due to be complete during mid-year shutdowns.

•  Underground operations are now under way at the Oyu Tolgoi underground copper/gold project in Mongolia, following the comprehensive agreement reached with our partners on 25 January 2022. Sustainable production is expected in the first half of 2023, with the capital forecast at $6.925 billion, including $175 million of estimated COVID-19 impacts to the end of 20214.

•  The $0.9 billion first phase of the south wall pushback at Kennecott in the US, extending mine life to 2026, is now complete and we are gradually accessing higher copper grades. Stripping for the $1.5 billion second phase, extending operations to 2032, remains on track. In July, we announced a $108 million investment for underground characterisation studies: potential underground mining would occur concurrently with open pit operations and result in increased output.

•  At the Jadar lithium-borates project, we committed $2.4 billion of funding in July, subject to receiving all relevant approvals, permits and licences. In January 2022, the Government of Serbia cancelled the Spatial Plan for the Jadar project and required all related permits to be revoked. We are disappointed by this announcement and are committed to exploring all options and are reviewing the legal basis of the decision and the implications for our activities and people in Serbia.

•  The Zulti South project at Richards Bay Minerals (RBM) in South Africa remains on full suspension.

•  At the Winu copper-gold project in Western Australia, there has been progress towards securing consent from the Traditional Owners to the Project Agreement in advance of submitting the necessary environmental and regulatory approvals. Drilling, fieldwork and study activities continue to progress to schedule.

•  At the Resolution Copper project in Arizona, we continue to work with the US Forest Service to secure approval of the Final Environmental Impact Statement. In parallel, mine studies and engagement with the Native American tribes and local communities continue to progress.

•  At the Simandou iron ore project in Guinea, we continue to engage with key stakeholders in-country including the Government of Guinea. We remain committed to an inclusive partnership, seeking mutual and sustainable benefits by developing our project in line with international social and environmental standards. A new drilling programme has commenced, and expressions of interest are being sourced for construction and early development works expected to be carried out in 2022.

1.   This financial performance indicator is a non-GAAP alternative performance measure (“APM”). It is used internally by management to assess the performance of the business and is therefore considered relevant to readers of this document. It is presented here to give more clarity around the underlying business performance of the Group’s operations. APMs are reconciled to directly comparable IFRS financial measures on pages 78 to 86.

2.   Refer to page 50 for pre-tax analysis of impairment charge.

3.   Potential for capital cost to rise by around 15% due to ongoing COVID-19 restrictions on commissioning and ramp-up of Pilbara growth and brownfield mine replacement projects, including labour access and supply chain quality issues. The latter has been exacerbated by an inability to conduct pre-delivery quality assurance and control at international steel and equipment manufacturers due to limitations on travel.

4.   These estimates exclude any impacts of delays to work schedules caused by restricted approved budgets since the start of 2021. This, together with any ongoing COVID-19 impacts, will be assessed following the commencement of underground operations with further updates provided to the market in due course. Panels 1 and 2 studies will be ongoing throughout 2022. Further study work is also under way to assess the extraction methodology and ultimate recovery of the Panel 0 recoverable pillars.

Communities & Social Performance (CSP)

At the end of 2021, the relationship between Puutu Kunti Kurrama and Pinikura (PKKP) leadership and Rio Tinto Iron Ore is constructive and considered. The ongoing rehabilitation works at Juukan Gorge are on schedule and have the active involvement of the appointed Puutu Kunti Kurrama (PKK) committee members. An agreement on a co-management of Country approach and an appropriate remedy for the destruction of Juukan Gorge is substantially progressed. Together we are charting new territory, and this takes time, but we are moving forward on a model which is respectful and seeks to provide certainty of protection for cultural heritage while mining activities take place.

On 30 September, we published our first CSP commitments interim report as part of our efforts to increase transparency in our approach to cultural heritage protection. Over the past months, we have been working hard to rebuild trust and meaningful relationships with the Pilbara Traditional Owners. We have also been working on actions to strengthen our cultural heritage approach, processes and performance.

On 17 October, we welcomed the Joint Standing Committee on Northern Australia’s final report into the destruction of the rock shelters at Juukan Gorge. We continue to work closely with Traditional Owners to build trusted relationships and better understand and protect their cultural heritage.

On 14 February 2022, we announced an agreement with the Yinhawangka Aboriginal Corporation on a new co-designed management plan to ensure the protection of significant social and cultural heritage values as part of our proposed development of the Western Range iron ore project in the Pilbara region of Western Australia. The Social, Cultural Heritage Management Plan is the result of strong collaboration over the past year between the Yinhawangka people and Rio Tinto including “on-Country” visits, archaeological and ethnographic surveys and workshops. As a result, the mine has been designed to reduce impacts on social and cultural heritage values. We submitted the plan to Western Australia’s Environmental Protection Authority on 1 February 2022, as part of our submission regarding the Greater Paraburdoo Iron Ore Hub Proposal.

Climate change strategy update

We have put the low-carbon transition at the heart of our new business strategy and are ready to make an important contribution to tackling climate change. In 2021, we set more ambitious decarbonisation targets for our operations and we are stepping up our approach and goals to partnering with our customers for the decarbonisation of our value chains.

We now aim to achieve a 15% absolute reduction in Scope 1 and 2 emissions five years earlier, by 2025, and have more than tripled our 2030 target to reduce emissions by 50% against our 2018 equity baseline. Our new target with our commitment to reach net zero emissions by 2050 is aligned with efforts to limit warming to 1.5°C, which is aligned with the stretch goal of the Paris Agreement.

In 2021, our Scope 1 and 2 emissions were 31.1Mt CO2e (2020: 31.5Mt CO2e), 4% below our 2018 equity baseline. The reductions achieved since 2018 are primarily the result of switching to renewable electricity contracts at Kennecott in the US and the Escondida mine in Chile (managed by BHP; Rio Tinto owns 30%), and also relate to unplanned operational disruptions in 2021 at Richards Bay Minerals in South Africa and the Kitimat aluminium smelter in Canada.

Our 2025 and 2030 targets are supported by a decarbonisation roadmap focused on the accelerated deployment of renewable power and the development of projects from our marginal abatement cost curve. In 2021, we progressed studies across a broad range of emissions reduction opportunities and approved 0.26Mt CO2e of new abatement projects, including solar and wind projects at Weipa, QIT Madagascar Minerals (QMM) and Kennecott.

We recognise that to thrive in the long term we need to be part of net zero value chains. Our approach to addressing Scope 3 emissions is to engage with our customers on climate change and work with them to develop and scale up the technologies to decarbonise steel and aluminium production.

Our Scope 3 emissions were 554Mt CO2e in 2021 (2020: 570Mt CO2e), of which around 95% is from the processing of iron ore, bauxite and other products by our customers. 94% of these processing emissions take place at customer facilities in China, South Korea, Japan and other countries that have pledged to be carbon neutral by around mid-century. As our customers start to align with their governments’ pledges, we note that about 28% of our iron sales are directly to steel producers that have already set public targets for their Scope 1 and 2 emissions (our Scope 3), and have ambitions to reach net zero by around mid-century.

For 2022, we have committed to engage with all our direct iron ore customers, representing approximately 75% of our iron ore sales and related Scope 3 emissions, and all our bauxite customers to share information on our respective climate change goals and roadmaps, and actively seek areas of mutual collaboration on decarbonisation projects and technologies. Progress on both our Scope 1 and 2 targets as well as Scope 3 goals are explicitly linked to executive remuneration.

In 2021, the Board announced its intention to put a Climate Action Plan before shareholders at our 2022 annual general meetings and seek a non-binding advisory vote on the company’s ambitions, emissions targets and actions to achieve them.

Our 2021 Climate Change Report is available on our website, riotinto.com.

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