Rio Tinto
Rio Tinto (LSE: RIO) released its first-half results today. Underlying earnings fell 43% to $2.92 billion for the first six months of 2015, following the collapse in the price of iron ore during the start of the year.
Underlying earnings from iron ore fell 55% during the first half, and similar declines in profitability were visible from its copper and coal operations. The one bright spot was its aluminium operations. Higher aluminium prices in North America led underlying earnings from aluminium operations to soar 113% to $793 million in the first six months of 2015.
Looking forward, aluminium is likely to continue to outperform the other commodities, as rising demand from the automotive sector and other industries is likely to outstrip supply growth in the medium term. Although North American premiums have started shrink since the second quarter of 2015, Rio’s aluminium operations should remain highly profitable with steady production growth.
Although underlying earnings fell 43%, operating cash flow only fell 19% to $4.44 billion. But, this did not stop net debt from rising 10% to $13.68 billion. Despite rising debt, the company remains committed to increasing shareholder returns through a combination of share buybacks and dividends. Rio increased its interim dividend by 12% to $1.075 (approximately 68.9 pence) per share. With the fall in the value of the pound, the increase in the dividend is closer to 21% in sterling terms.
As Rio has one of the lowest levels of indebtedness in the mining sector, Rio’s dividend is sustainable for many years with commodity prices remaining near today’s levels. But, with a slowing economy in China and oversupply in iron ore and energy markets, the prices of many commodities seem to have further to fall. With this prospect in mind, I would prefer to stay out of Rio’s shares for now.
Shares in Rio fell 0.3% to 2560 pence during morning trading.
Old Mutual
Old Mutual (LSE: OML) shares rose 3.2% to 225.5 pence, following the release of a strong set of results for the first half of 2015. Adjusted operating profits increased 19% (20% on a constant currency basis), with some very strong growth from its banking business in Africa. Its asset management also saw robust growth in net cash inflows and strong investment performances. With all its businesses showing good progress, the future is bright for the company.
Shares in Old Mutual may have already risen 16% since the start of this year, but they could have much further to climb. Its forward P/E is just 10.7, on analysts’ expectation that underlying EPS will grow 9% to 19.5 pence this year.
Inmarsat
Shares in Inmarsat (LSE: ISAT) did even better, having risen 4.0% to 933 pence during morning trading. The market reacted positively to news that its third Global Xpress satellite will now be launched at the end of this month. The company is confident the project will generate at least $500 million per year in the first five years of operation. A rocket launch failure back in May had caused a three month delay, but the market had expected the delay would have been much longer.
But, the company’s dismal first half results could be a warning sign that demand for its satellite based communication services may not be as strong as previously anticipated. Revenues fell 5.5% to $616.2 million, as demand from governments and maritime users fell. With lower commodity prices forcing mining and oil companies to cut back on exploration and production projects, demand for Inmarsat’s services is likely to remain weak in the medium term.
To make matters worse, Inmarsat’s shares trade at a pricey forward P/E of 31.6.
