(Bloomberg Opinion) -- The world’s second-largest miner is proving pandemic-resistant.Rio Tinto Group’s latest results show earnings dipped only modestly as iron ore offset tarnished base metals. The steel ingredient’s long-term future looks distinctly rusty, but that’s not yet reality in 2020. Stubbornly high prices have again helped sate investors with dividends in a climate of sub-zero yields, meaning boss Jean-Sebastien Jacques is under little pressure to change tack. Until the global economy recovers, Rio will remain a near-perfect bond proxy.First-half underlying earnings came in at $4.75 billion, before impairments largely related to the aluminum business. That’s down 4% from a year earlier but above market expectations, thanks to top-earner iron ore, which cushioned the impact of worse performances in copper, aluminium and diamonds. Even compared to 2019, when it surged after Brazilian miner Vale SA’s fatal dam collapse, iron ore has shone this year — this time thanks to coronavirus-linked closures and other disruptions. The 72% margin at Rio's Pilbara — based on earnings before interest, tax, depreciation and amortization — and an average realized price of $85.4 per dry metric ton bode well for peers including Vale, reporting later Wednesday, not least as the current market price is now a quarter above that.
Jacques’ team presented broadly what investors have come to expect from mining majors: relatively pedestrian production, decent free cash flow — even if a drop to $2.8 billion will disappoint some — and modest debt, with a net gearing ratio of just 10%. Plus, of course, a respectable payout. After all, miners are still building up their reputations as good custodians of shareholder cash.The trouble is just how much of this picture depends on iron ore — for this six-month period, the division accounted for roughly 80% of group Ebitda and well over 90% of earnings. That’s great news for the digger’s profits today, but less so for tomorrow’s prospects. Appetite is set to eventually ease along with China’s latest infrastructure splurge, and steel demand will cool. Supply looks plentiful, thanks to projects like Rio’s own problematic but alluring Simandou in Guinea. As Jacques said Wednesday, there is no question that mega-mine will eventually get built.Still, future problems look a lot less pressing when you’re the world’s top producer and iron ore is trading at over $100 per ton. Anglo American Plc’s South African iron ore business has pointed to a price level closer to $90 for the second half — hardly a headache for Rio, with cash costs at $14.5 per ton. In a volatile world of second-wave outbreaks and rock-bottom borrowing costs, investors are less anxious about growth than they are about stability and yield.
On that front, Rio continues to deliver. There was no one-time splurge, but Rio still promised $2.5 billion of interim dividends, bringing what shareholders have received in cash returns since 2016 to $38 billion. Even with spending ticking higher, it’s hard to see that shifting. Deals are expensive, too: The balance sheets of long-mooted copper targets like Freeport-McMoRan Inc. and First Quantum Minerals Ltd. are looking healthier than they have in some time, making them harder prey.
Super-generous returns are ultimately hard to sustain for a company that digs stuff for a living, especially one that should be doing far more to edge toward a greener, carbon-light economy. And there were welcome glimmers of growth, not least from higher spending and Rio’s exploration work in the Australian outback, where copper and gold finds could boost output and prove the sort of progressive investment that is likely to be welcomed.Corporate heavyweights change slowly. The truth, though, is that iron ore is simply working too well for now, for both Rio and dividend-hungry investors. Until they begin to demand more production, the global economy recovers, and inflation moves higher, there just isn’t a lot of incentive to shift away from austerity and splurge on risky growth. As in past cycles, it will eventually happen. Jacques just needs to call the turn before his rivals.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.
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