THE MINING CRUNCH IS HERE: Rio Tinto's earnings halved as price falls cause $US7.7 billion in pain

Rio Tinto’s Oyu Tolgoi mine in Mongolia. Paula Bronstein/Getty Images.

The mining crunch is here.

Rio Tinto’s full-year underlying earnings have been cut almost in half to $US4.54 billion as falling commodity prices, mainly iron ore, continue to crush profitability in the sector.

The results mean a full-year net loss of $US866 million for the mining giant, compared to net earnings the previous year of around $US6.5 billion.

The effects of commodity price falls had an astonishing $US7.7 billion impact on Rio’s earnings.

Underlying earnings from iron ore operations more than halved to $US3.9 billion from $8.1 billion the year before.

This table from the results presentation shows the stunning change in Rio’s performance last year compared to 2014:

It maintained its dividend, at 215 US cents steady on last year, but the company decided to abandon its progressive dividend policy, meaning it is unlikely to keep payouts at that level.

Instead, it will set a rate at the end each financial period taking into account the results for the financial year, the outlook for major commodities, the long-term growth prospects of the business and the company’s objective of maintaining a strong balance sheet.

The underlying earnings at $US4.54 billion, within analyst expectations, are well down last year’s $US9.3 billion.

Mining companies worldwide have been squeezed by collapsing commodity prices amid a slowdown in global demand, mainly caused by China’s transition away from an industrial economy towards one more based on consumption.

Despite a recent technological revolution in mining over recent years ranging from the use of robotic pit exploration and widespread vehicle automation, the cost bases in the industry are enormously difficult to reduce quickly.

The dividend policy of Rio Tinto and its main competitor, BHP Billiton, have made the stocks particularly attractive to investors, so it is a significant step to make a change on this.

The net loss of $US866 million reflected exchange rate and derivative losses of $3.3 billion and impairment charges of $1.8 billion.

The miner has cut costs, frozen wages, increased ore output, pulled back on capital spending and is reducing debt in response to falling commodity prices.

CEO Sam Walsh says the company continues decisive action to preserve cash through further cost reductions, lower capital expenditure and the release of working capital.

This focus on cash resulted in operating cash flows of $US9.4 billion.

“At the same time, we have significantly strengthened our balance sheet and finished 2015 with net debt of $13.8 billion, which is $700 million better than the $14.5 billion pro-forma position at the end of 2014,” Walsh says.

“The continued deterioration in the macro environment has generated widespread market uncertainty.”

Walsh says the company will start on a new round of measures to cut operating costs by a further $1 billion in 2016 followed by an additional goal of $1 billion in 2017.

Capital expenditure is being cut to $4 billion in 2016 and $5 billion in 2017, an overall reduction of $3 billion compared with previous guidance.

“These significant actions provide us with the confidence that we remain robustly positioned to maintain both balance sheet strength and deliver shareholder returns through the cycle,” Walsh said.

Iron ore, the biggest earner for Rio Tinto, is trading well under $US50 a tonne, depressed by slowing demand in China and increased global supply.

EBITDA from iron ore fell 45% to $US7.87 billion in the full year to December. Iron ore shipments were up 11% to 336.6 million tonnes.

Standard and Poor’s has lowered its price assumption for iron ore and says the severe supply and demand imbalance in the iron ore market could continue for another two years.

The ratings agency has place Rio on a negative watch.

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