Rio Tinto makes history, but Ukrainian tragedy looms

Who were the winners of the February 2022 Reporting Season? Last week saw Rio Tinto announce a record result, confirming the second biggest profit in Australian corporate history and declaring the nation’s biggest ever dividend on the back of strong commodity prices. So what can we expect from the company in 2022?

Geopolitics is sadly at the front and centre, with a human tragedy unfolding in Ukraine following invasion by Russian forces. As substantial providers of oil and gas to the world, and with fears of the war escalating, will we continue to see a risk-off event globally?

With the February reporting season now at an end, what were the highlights, lowlights and key themes for the month?

Transcript

Last week Rio Tinto (ASX:RIO) announced a record result, confirming the second biggest profit in Australian corporate history and declaring the nation’s biggest ever dividend. What drove that result?

Rio benefited from very strong commodity prices right across the spectrum during 2021. It wasn't just a story of iron ore, though, with their copper and aluminium divisions also reporting very strong results, cash flows and dividends were a record, and the balance sheet remains in a net-cash position, so the company is in a very strong place. Operationally RIO was a little disappointing, with costs and volumes not performing to expectations. RIO is now the highest cost producer in the Pilbara, from a position of where they were once lower than BHP and Fortescue. The expectation going forward though is that in 2022 we should see another strong year of earnings, cash flow and dividends as commodity prices are expected to remain high.

Beyond Rio Tinto, what, in your view, were the highlights or lowlights in week 4 of reporting season?

The lowlights were high-growth stocks with little to no earnings that have been found wanting this reporting season. These names have no real underlying valuation to fall back on, and thus have really been in freefall in many cases when results have not exceeded or matched expectations. From a more positive side, Woodside (ASX:WPL) is the second-best performing stock on the ASX200 this year to date, just beaten recently by CIMIC (ASX:CIM) which has just been bid for by its major shareholder. Woodside presented a very positive result, the highlight being its exposure to rising spot gas prices and the merger with BHP Petroleum, which will transform it into a very strong cash flow generative company with a strong cash position, balance sheet and growth projects that they can arguably be self-funded. Around Ninety percent of assets will be sitting in OECD countries, so this feels like a good place to invest given what we are seeing currently in Ukraine as gas and oil prices continue to rise.

And looking at the February period overall, were there any key themes that stood out for you during the month?

Outlook statements were more constructive overall than I would have thought leading into reporting season. I am assuming most companies are seeing more light at the end of the long COVID tunnel as borders and restrictions come off. Labour shortages in a number of industries has been called out and thus wage pressure is starting to emerge. This should make the RBA happy given they're looking for wage pressure to allow them to raise interest rates. However, the lightening of the border restrictions both between states and internationally should help alleviate these labour shortages. Inflation has also been called out across a number of sectors and it's difficult to see any short-term relief. Global supply chains are still stretched, oil and gas prices are at decade highs and, in the case of gas prices, record highs. Coles (ASX: COL) and Woolworths (ASX:WOW) are starting to see food inflation and this is likely to continue. The big question is whether inflation is transitory due to COVID or more permanent, I believe that the evidence is currently a combination of both.

Lastly, geopolitics is now absolutely at the front and centre, with Russia launching military action against Ukraine at the end of last week. How do you feel this impacts the outlook for markets?

My thoughts go out to all the Ukrainian people in these tough times as Russia is invading. Unfortunately, the pending humanitarian disaster is not great. From a markets perspective, it is multi-faceted and difficult to predict given the fog of war, however predictably in the lead up to this invasion and on the first night we've seen a risk-off event globally, with indices falling. This is likely to continue in the markets until we get some clarity on whether the war escalates or is confined within Ukraine itself.

The reactions from global governments is important, and at this stage sanctions appear to be the primary weapon. The quantum and type is still not clear. Russia and Ukraine provide substantial proportions of the world's oil and gas needs, aluminium, wheat, palladium and nickel to name a few, and all these prices have substantially increased. Europe is very reliant on Russian gas, and thus turning off the pipelines would hurt Russia but also Europe. At this stage central banks have not said much, however given the potential inflationary pressures due to higher oil and gas prices, and perhaps slower growth, interest rate rises might be delayed from the central banks.

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