Rio Tinto Swings to Profit in FY16, Beats Earnings View

Rio Tinto Swings to Profit in FY16, Beats Earnings View
February 21, 2017

 
In the second week of February, mining giant Rio Tinto Plc (NYSE: RIO) reported a decline in the fiscal 2016 revenue, compared with last year. However, the stock hit a 12-month high of $47.11. The main reason for the rise in the share price is the swing to profit in fiscal 2016, compared to a loss in the prior fiscal year. Considering the optimistic outlook for fiscal 2017, we anticipate the stock to rally further in the weeks ahead.

The London-based company reported fiscal 2016 revenue of $33.78 billion, down from $34.83 billion in fiscal 2015. Low average commodity prices were primarily responsible for a decline in revenue. During the fiscal 2016, Rio Tinto posted a net profit of $4.62 billion or $2.55 per share, compared with a net loss of $866 million or $0.48 per share in fiscal 2015.

The FY16 underlying earnings per share increased 12% to $5.10 billion or $2.84 per ADR (American Depositary Receipt), from $4.54 billion or $2.49 per ADR in FY15. The fiscal 2016 earnings also surpassed analysts’ estimates of $4.87 billion. Underlying earnings per share is an important indicator used by the management of Rio Tinto to assess its own performance.

The exploration and evaluation costs of Rio Tinto decreased 13.7% to $497 million in fiscal 2016. So far, the company has realized cost savings of about $1.6 billion of the $2 billion targeted for 2016 and 2017. Rio Tinto hopes to achieve the rest of the cost savings in this year. The company is taking steps to remain profitable over the entire commodity cycle.

The company anticipates capital expenditure of about $5 billion in 2017 and $5.5 billion in 2018. Rio Tinto expects to generate free cash flow of $5 billion by 2021. Net debt decreased to $9.6 billion in 2016, from $13.8 billion in fiscal 2015. Rio Tinto declared dividend of $1.70 per share for fiscal 2016, down from $2.23 per share paid in the prior fiscal year, but greater than the minimum of $1.10 per share guaranteed by the board.

About 90% of Rio Tinto’s profit comes from the export of iron ore. The price of iron ore hit a two and a half year high of about $93 last week. This is expected to further boost the bottom line of the company in the current quarter. Considering the windfall gain, the company has announced a $500 million share buyback program. Thus, we anticipate the stock to remain in a bullish orbit in the current quarter.

On Friday last week, the stock successfully tested the major support level of 45.20. The stochastic oscillator is rising out of the bearish zone. Thus, we can hope for a technical bounce back.

Rio Tinto - Technical Analysis - 21st February 2017

A high or above contract would be ideal to trade at this point in time. The entry into the trade should be made when the stock trades near 45.50. The binary trader can increase the probability of success in the trade by opting for an expiry date between February 28th and March 2nd.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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