Rio Tinto's 2012 Loss Upstages Cliffs Natural Resources

Global mining giant Rio Tinto (NYSE: RIO  ) is promising big changes after unleashing a $3 billion loss for 2012 on its investors. The loss, which is the biggest in company history, has new CEO Sam Walsh promising a relentless focus on shareholder value and greater discipline as he takes the reigns. 

Contributing to the loss was a combination of a drop in commodity prices along with a massive $14.4 billion in impairment charge. The company acknowledged poor judgment in its $38 billion purchase of Alcan in 2007 and recent $3 billion deal for Riverdale Mining which both contributed to the writedown. While the headline number is bad, the company actually did generate underlying earnings of $9.3 billion for the year though this is a 40% drop from the company's profits a year ago. 

Rio Tinto joined mining peer Cliffs Natural Resources (NYSE: CLF  )  in disappointing investors with writedown-inspired losses, though it's fate has been much better. Cliffs investors had to endure a 20% free fall in share price Feb. 13 after an $899 million loss due to its own massive impairment charge and commodity pricing pressures. The company was forced to slash its dividend 76% and announce a dilutive capital raise to rightsize its balance sheet. Rio investors, on the other hand, were given a 15% dividend raise for sticking with the company as it works through its issues. 

With both companies experiencing commodity price drops it makes you wonder how BHP Billiton (NYSE: BHP  ) will fare when it reports results on Feb 20. While BHP isn't as heavily invested in aluminum as Rio Tinto, the company does have a large iron ore business which is something to watch. Cliffs saw its Asia-Pacific iron ore business revenues drop 23% despite volume jumping 56%. It will be interesting to see if this is an issue specific to Cliff's, or if it has spilled over to BHP as well. 

For Rio Tinto investors, it appears that the company is planning on putting its past acquisition mistakes behind it; instead, will be focusing on disciplined capital allocation and growth. The company will be cutting over $5 billion in costs by the end of next year while looking to balance that out with prudent investments in projects or acquisitions that will earn the company well above its cost of capital. Of course it goes without saying that this is exactly how the company already should have been operating, but its better late than never. 

As Cliffs Natural Resources investors have clearly seen, mining is not without its risks. However, giving its recent spill, the company might be be tempting for value investors. It has grown from a domestic iron ore producer into an international player in both the iron ore and metallurgical coal markets and had performed in line with many of its competitors in a very cyclical industry because of several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's brand-new premium report on the company.

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Related Tickers

9/27/2016 4:01 PM
RIO $32.23 Up +0.06 +0.19%
Rio Tinto CAPS Rating: ***
BHP $32.62 Down -0.01 -0.03%
BHP Billiton CAPS Rating: ***
CLF $6.06 Up +0.01 +0.17%
Cliffs Natural Res… CAPS Rating: ***