Rio Tinto says free cash flow nearly quadruples in H1, some analysts unimpressed

Rio Tinto reported blow out first half numbers as the combination of government stimulus and strong demand amid constrained supply triggered a "significant" spike in most commodity prices.

But some analysts appeared to be dwelling on what they said were weaker-than-expected second quarter production figures published a fortnight before.

On the flip-side, Rio boss, Jakob Stausholm, called attention to the group's Jadar lithium project, which he said signalled its "large-scale" entry into the market for electric vehicle battery materials.

For the six months ending on 30 June, the company posted a 271% jump in net earnings to $12.31bn with its free cash flows nearly quadrupling to $10.18bn.

Earnings before interest, taxes, depreciation and amortisation were up by 118% at $21.04bn (UBS: $21.55bn).

Rio's guidance for capital expenditures in 2021-23 was steady at around $7.5bn per year, but iron ore shipments were expected to be at the low end of the guidance range.

Management cited weather and markets conditions, together with the tie-up and ramp-up of brownfield replacement mines as the reasons for the latter.

The board declared an interim payout of $5.61 per share, comprised of an ordinary dividend of $3.76, up by 143%, and a special dividend of $1.85.

At period end, Rio Tinto had $3.1bn of cash on hand, after $6.4bn of cash returns and versus $0.7bn of net debt at year-end 2020.

In a research report sent to clients ahead of the company's results, UBS analyst Myles Allsop said the risk/reward in the shares was no longer compelling despite Rio's high cash returns.

Hence his recent decision to downgrade the shares to 'sell'. The analyst also said the group's production update had been weaker than expected and noted how Rio had lowered its guidance for full-year iron ore shipments.

He also said that the company's stock was pricing in a $80-90/dmt cfr iron ore price (with aluminum and copper at spot), UBS on the other hand was projecting a long-term price of %65 per tonne.

As of 0907 BST, shares of Rio Tinto were down by 1.71% at 5,938.0p, but had stil nearly doubled from their lows in 2020 in the wake of the Covid-19 pandemic.