Rio Tinto plc (LON:RIO) (LSE:RIO.L) has released results for FY 2016 today. It has generated strong operating cash flow of $8.5 billion and underlying earnings of $5.1 billion. This was aided by $1.6 billion of pre-tax sustainable operating cash cost improvements.
Rio Tinto has optimised the portfolio, with disposals of $1.3 billion announced or completed in FY2016. Up to $2.45 billion in disposals have already been announced in 2017. It continues to invest in major growth projects in bauxite, iron ore and copper. This will be helped in my view by a balance sheet which is getting stronger, with net debt reduced to $9.6 billion. This means it has a gearing ratio of 17% against 24% from FY2015.
In total, $3.6 billion will be returned to shareholders in respect of FY2016. Of this, $3.1 billion is via a full year dividend of $1.70 per share, while a share buy-back of $0.5 billion during the course of 2017 will make up the balance. This total figure of $3.6 billion represents around 70% of 2016 underlying earnings.
Investors have reacted slightly positively to today’s update. Rio Tinto’s shares are 1.2% higher in a generally flat market. In the last year they have lagged other mining companies such as Glencore PLC (LON:GLEN) (LSE:GLEN.L), Anglo American plc (LON:AAL) (LSE:AAL.L), Antofagasta plc (LON:ANTO) (LSE:ANTO.L) and BHP Billiton plc (LON:BLT) (LSE:BLT.L). BHP Billiton is up 93%, Antofagasta has risen 89%, Glencore is 212% higher and Anglo American is 259% up in the last 12 months. Rio Tinto is 87% higher in the same time period.
In my view, Rio Tinto has a good strategy and could perform well in the long run. I like its debt reduction strategy and I think it could improve investor sentiment, as has been the case with Glencore in particular following its decision to reduce debt. I think Rio Tinto faces an uncertain future, but has the cash flow to come through. Therefore, it’s still one of my top mining picks.