As dividend stalwarts such as HSBC and Royal Dutch Shell slash their payouts in response to Covid-19, mining giants such as Rio Tinto are accounting for an increasing share of the returns on offer to London investors (Emily Gosden writes).
The Anglo-Australian group reported “resilient” half-year results yesterday, with underlying ebitda (earnings before interest, taxation, depreciation and amortisation) down a modest 6 per cent to $9.6 billion.
It declared an interim dividend of $2.5 billion, 3 per cent up on a year ago, although this year there is no special dividend on top. The Link Group estimates that Rio will be the fourth biggest payer of dividends to London investors this year.
Rio Tinto is one of the world’s biggest mining groups. Although it produces a diverse array of metals and minerals globally, it remains overwhelmingly focused on iron ore production, primarily in Australia. The commodity, used in steelmaking, accounted for 73 per cent of its underlying ebitda last year. That increased to 77 per cent in the first half of this year after prices for other commodities such as copper fell. On an underlying earnings basis, iron ore accounted for 91 per cent.
The lion’s share of iron ore is imported by China, the world’s biggest steelmaker, where demand appears to have bounced back strongly. JS Jacques, Rio’s chief executive, said that he believed China had “enjoyed a very steep V-shaped recovery”. This helped to sustain prices through the first half of the year. While volatile, prices averaged out to be broadly stable on the same period a year earlier, Rio said.
However, as Mr Jacques admitted, there are big questions over economic growth and spending that will shape iron ore demand in coming years, including much more uncertainty over recoveries outside of China. Iron ore prices have continued to rally through July, but most analysts see them retreating from present highs of more than $100 a tonne in the second half of the year.
Admittedly, with Rio’s low costs yielding margins of 72 per cent in Australia at present, it will still be making healthy profits at lower prices and also stands to benefit from a resurgence in copper and aluminium prices.
Nevertheless, there are a number of issues that should concern investors. First, Rio has caused itself untold reputational damage in its most important production centre by blowing up two 46,000-year-old Aboriginal caves in May.
Both the initial incident and Rio’s subsequent handling of it are worrying. Mr Jacques will make a high-stakes appearance at an Australian parliamentary inquiry into the debacle next week and cannot afford any missteps.
Second, there are risks from unresolved legal issues. The US Securities and Exchange Commission is still pursuing Rio over fraud allegations related to a disastrous coal acquisition in Mozambique in 2011; Rio insists that the case is “unwarranted”. The company is also under investigation over alleged bribery related to a 2011 payment linked to its Simandou project in Guinea.
Third, there is a real risk of further cost overruns at Rio’s biggest development project, the Oyu Tolgoi copper mine in Mongolia, which has encountered myriad challenges to date and is already up to $1.8 billion overbudget. Rio ultimately does need to diversify beyond its core iron ore business, but Oyu Tolgoi shows the risks inherent in doing so.
Rio’s dividend is attractive, but its shares have already recovered beyond pre-Covid-19 levels, closing up 33p, or 0.7 per cent, at £47.98 yesterday. Given the risks on the horizon, now may be time to take profits.
Advice Sell
Why Solid dividend has bolstered shares but risks lie ahead; take profits
Unite group
The outlook for Britain’s universities is uncertain amid fears over a fall in student numbers, scrutiny over the course value and growing pension liabilities (Louisa Clarence-Smith writes). However, it’s hard to see a future without a higher education sector that needs beds for students.
Unite Group is Britain’s biggest provider of student accommodation, renting rooms directly to students with 74,000 beds in 177 properties in 27 towns and cities, focused on the elite Russell Group universities. The landlord was inundated with cancellation requests at the start of lockdown, when it offered to waive rents for students who did not plan to use their rooms for the final term. It reported a £73.9 million loss before tax for the first half of the year.
Its shares have fallen by almost a third to 957p since the start of the year. However, the latest update suggests that it is on the road to recovery. It is expecting 90 per cent occupancy at the start of the academic year in September, with reservations at 84 per cent. Ninety-seven per cent of universities plan to provide in-person teaching this autumn and a record 40.5 per cent of British 18-year-olds have applied to university. The government has provided £2.7 billion of support for tuition fees and research funding.
The group has responded well to the practical challenges posed by the pandemic. It has received “Covid Secure” accreditation from the British Safety Council and its model of flat shares, where students typically have their own bedroom, bathroom and work station, is compatible with reducing the risk of the spread of infection.
It has changed its marketing to place a greater emphasis on domestic students. Despite concerns about the impact of tensions between Britain and China, the company, which has an office in Beijing, said that it had not seen signs of any slowdown in demand from the country.
Despite the risk of a further disruption from a second wave of Covid-19, it is anticipating reinstating dividend payments at the start of the 2020-21 academic year, assuming occupancy and income are in line with its expectations and there is a positive outlook for the year ahead.
Advice Buy
Why Demand remains strong and should be supported by quality of eduation
