Reinvent Technology Partners

Rio Tinto reported H1 2006 underlying earnings of $3.75 billion, up 80% year over year, and net earnings of $3.8 billion, up 75%. Cash flow from operations increased 39% to $4.4 billion, and dividends from jointly controlled entities and associates added $788 million for total cash flow of $5.2 billion, up 52%. EBIT margin rose to 44%. H1 capex was $1.8 billion; net debt was $2.6 billion and gearing was 14%. Looking ahead, management said H2 capex would likely be higher and could take full-year capex to around $4 billion. They reaffirmed the $4 billion shareholder return program through end-2007, noted $2.5 billion had already been returned by June, and said they would review capital management and the final dividend around year-end.

Leigh Clifford’s message was that every product group contributed to the earnings step-up, driven by strong prices, record or near-record production, and successful project ramp-ups. He emphasized that the group’s large growth pipeline is on schedule and within budget, calling it the biggest investment program in Rio Tinto’s history and saying it should create substantial shareholder value over time. His tone was confident but practical: he repeatedly noted weather disruptions, cost inflation, and operational issues, while stressing the company’s ability to mitigate them and keep running safely at full stretch.

Paul Skinner and Leigh Clifford highlighted a very strong financial position despite heavy investment and shareholder returns. Net debt rose slightly to $2.6 billion, reflecting capex, the capital management program and tax timing, while cash returned to shareholders in H1 totaled $3.1 billion through dividends and buybacks. Clifford said the capital return program was ahead of schedule with $2.5 billion returned by June, that the interim dividend was set at $0.40 per ordinary share, and that more capital management options would be reviewed at year-end. He also pointed to $5 billion of committed projects underway and said the balance sheet remained lightly geared and flexible.

Analysts focused on the balance between shareholder returns, capex, and potential M&A. Management said they were generating a lot of cash, investing heavily in value-adding projects, and would return any surplus cash efficiently, while not ruling out acquisitions if they created value. Questions also probed the project pipeline in Russia, Mongolia, La Granja, and Potasio Rio Colorado; management said those opportunities were still early stage, with infrastructure and tax issues being watched closely, and estimated Potasio Rio Colorado could take a couple of years after approval, with little production before 2009.