Can Rio Tinto plc Make £9 Billion Profit?

Will Rio Tinto plc (LON: RIO) be able to drive profits higher?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

mine site

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at Rio Tinto plc (LSE: RIO) (NYSE: RIO.US) to ascertain if it can make £9bn in profit. 

Have we been here before?

A great place to start assessing whether or not Rio can make £9bn in profit is to look at the company’s historic performance. It would appear that Rio was able to make a profit of just under £9bn back during 2010, as the price of iron ore surged to an all-time high of around $170 per ton.

Unfortunately, even though the price of iron ore continued to surge during 2011, Rio’s net profit slumped as the company was forced to take £6bn worth of asset impairments.

However, as the price of iron ore stabilizes and Rio cuts capital spending while increasing output at its low-cost mines, it would appear that the company is well placed to hit my profit target in the near future. 

But what about the future?

Rio’s management team has been working flat out during the past year to return the company to growth after two disastrous years for the company. Specifically, during 2011 and 2012 Rio was forced to write down the value of some assets by approximately £15bn and at the same time the company’s net debt jumped more than 80%.

Nevertheless, Rio returned to growth during 2013 and reported a net profit of £2.3bn along with a 10% reduction in net debt. What’s more, the global mining giant has the potential to drive profits much higher as management continues to divest non-core inefficient assets, cut operational costs and reduce exploration spending. 

In particular, Rio’s management is seeking to cut operating costs by around $1bn during 2014 and reduce net debt by a further $3bn to $5bn, strengthening the company’s balance sheet and reducing interest costs. 

And it would appear that the City has every confidence in Rio’s ability to meet these targets. Indeed, City analysts expect Rio to report a pre-tax profit of £10bn for 2014, well above my target. Still, this is pre-tax profit figure and Rio has paid a tax rate of 25% on average for the past five years. With this in mind I believe that Rio’s net income for 2014, according to current City estimates, will be in the region of £7.5bn, below my target but still double the figure reported for 2013.

Having said all of that, I should mention that Rio’s fortunes are tied somewhat to the state of the global economy as the company requires a high iron ore price to achieve high levels of profitability. 

Foolish summary

So all in all, based Rio’s current initiatives designed to reduce debt, cut costs and increase the production of low cost, high quality iron ore, lead me to conclude that overall, the company can make £9 billion profit. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert does not own any share mentioned within this article. 

More on Investing Articles

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »