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Rio Tinto primed for a commodity supercycle?

Rio Tinto 

Rio Tinto reported full year revenues of $44.6bn, up 3% year-on-year. That reflects 14% growth in Iron Ore – thanks to significantly higher market prices – offset by lower volumes and process elsewhere in the portfolio. Full year profit after tax rose 22% to $9.8bn, with underlying earnings per share up 21% to 769.6p.

Rio announced ordinary dividends during the year of 464 US cents per share, with an additional special dividend of 93 US cents. The total dividend is 26% ahead of last year.

The shares rose 3.5% in early trading.

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown:

“Rio has continued the recent trend in mining majors, with bumper results driven by high levels of efficiency and rising commodity prices. However, the destruction of historic aboriginal sites in Australia has marred what would otherwise be a very good year for the group – ultimately costing the company much of its senior management team.

Iron ore has been the standout performer, and since that remains Rio’s bread & butter that’s turbo charged results at the group level. Higher cash flows and some caution on shareholder returns means net debt has tumbled and the balance sheet looks in excellent shape to fund a planned uptick in capital expenditure.

Increased investment, rather than increased shareholder returns, is an attractive option at the moment. With speculation doing the rounds that we’re on the edge of a commodity supercycle, if the group can add to it’s portfolio it stands to achieve some very attractive sales prices for its products.

However, investors should remember that commodities can be fickle – with prices booming or bombing at the least expected moments. That can leave miners high and dry if they overextend the balance sheet at just the wrong time. A balance sheet on the cusp of being debt free means Rio’s pretty well placed at the moment, but the juggling act between investing in growth and preparing for tougher times is a difficult one.”

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