Today I am looking at whether Rio Tinto‘s (LSE: RIO) (NYSE: RIO.US) plans to reduce capital outlay is likely to boost long term earnings growth.
Capex on the wane as commodities slide
In days gone by — certainly before the 2008/2009 banking crisis — a backdrop of bubbly commodity prices prompted huge asset purchases across the entire mining sector, as companies tried to make hay while the sun shone and maximise their project base for future years.
But with the mining space still struggling to come to terms with the financial meltdown of five years ago, and swathes of new material hitting the market as said projects increase production, Rio Tinto — like many of its peers — is embarking on a huge capital de-escalation programme.
The company slashed total capital expenditure by a whopping 26% alone in 2013, to $12.9bn, and plans to keep lightening chequebook activity
over the medium term at least. Total spend for this year is expected to register at less than $11bn, and in 2015 this is predicted to fall to $8bn.
On top of this, Rio Tinto is also operating an extensive divestment programme to shed itself of non-core assets, as well as to bolster its balance sheet. The mining giant announced or completed some $3.5bn worth of asset sales in 2013 alone, including the $820m sale of its 80% stake in the Northparkes copper-gold mine, and $1bn agreement to offload its 50.1% holding in the Clermont thermal coal facility for $1.1bn.
City forecasters expect Rio Tinto’s attempts to reduce spending, spin off underperforming assets and slash group costs to push earnings higher over the next couple of years. Indeed, the miner is expected to punch earnings growth of 4% and 10% in 2014 and 2015 correspondingly.
The miner is undoubtedly boxing clever in its attempts to rein in exploration spending, as new supply hitting the market across the commodities spectrum looks set to continue outstripping demand, at least over the next couple of years.
Such reductions are likely to weigh on Rio Tinto’s ability to play the long game, as a rising global population of course looks poised to drive demand higher over the coming decades, but in the meantime the miner is taking the sensible option by shoring up its financial position.
Whether these measures will be enough to mitigate further falls in commodity prices remains to be seen, however, particularly if the economic slowdown in emerging markets — and particularly that of manufacturing giant China — continues apace.