A stack reclaimer with a pile of iron ore at the Rio Tinto Parker Point ship loading terminal in Western Australia. Picture: REUTERS
A stack reclaimer with a pile of iron ore at the Rio Tinto Parker Point ship loading terminal in Western Australia. Picture: REUTERS

London — Rio Tinto announced its highest margins in a decade and a record dividend payout on Thursday, but acknowledged it was grappling with operational issues in Australia and Mongolia.

Underlying earnings for the six months ended June 30 rose 11% year-on-year to $4.93bn, just shy of a consensus estimate of $4.95bn compiled by Vuma Financial.

Rio’s shares were down 3.4% by 1.30pm GMT in London. They have risen by more than 20% for the year.

Analysts cited macro-economic tensions as a reason for caution, as growth slows in China, Rio’s biggest customer for iron ore.

Fund managers, speaking on condition of anonymity, said operational problems and concerns over Rio Tinto’s giant Oyu Tolgoi copper expansion project in Mongolia also weighed on the share price.

Iron ore accounts for more than 60% of Rio Tinto’s earnings. Iron ore supplies have been squeezed after a Vale dam burst in Brazil in January, killing at least 240 people and forcing the suspension of production. Cyclone disruption in Australia also cut output.

Reduced supplies meant iron ore outperformed other base metals on commodity markets this year, generating high margins for miners even if their sales volumes have fallen.

Rio said its Pilbara iron ore project in Australia had delivered a 72% earnings before interest tax, depreciation and amortisation (ebitda) margin, compared with the group’s overall ebitda margin of 47%, making for the highest margins in a decade.

Strong earnings growth allowed the miner to increase its interim dividend by 19% to 151c per share. It also announced a special dividend of $1bn, making for total interim returns to shareholders of a record $3.5bn.

Already in 2019 Rio has delivered $7.8bn to shareholders and a total of $32bn over the past three and a half years, CEO Jean-Sébastien Jacques said.

“What do investors want? Rio offers high yield and investors want yield,” Chris LaFemina, who rates Rio a “buy”, an MD at Jefferies bank, said in a note. Rio can offset headwinds by increasing capital returns, but will not be immune if macro-conditions deteriorate further, he said. 

Jacques said he believed trade tensions between the US and China will be resolved. “I’m always the optimist. I feel at some point, common sense will prevail.” 

He said the company also faces issues it should be better able to control, including cost overruns and delays at the copper project in Mongolia, as well as operational problems that have impacted production at the flagship Pilbara iron ore assets.

Pressed on the extent and cost of delays at Oyu Tolgoi, Jacques said the company is using complex modeling and the full extent of what the company faces is  not yet clear. “We hope, by early 2020, we’ll have a better sense of what the option is to unlock the value of this world-class resource.”