Plenty of board directors can only dream of their company sporting a 42% margin on earnings before interest, taxes, depreciation and amortisation. That’s what Rio Tinto is expected to crank out this year on the key profit measure, per estimates collated by LSEG. Trouble is, the $100 billion miner usually lags major rival BHP BHP, which looks set to hit 50% this year. That explains why the marching orders Rio Chair Dominic Barton has given to new CEO Simon Trott include improving its financial discipline. He has a long slog ahead of him.

What’s mostly holding Rio back is its iron ore business, which accounts for around 70% of the company’s EBITDA and which Trott has run since 2021. BHP’s operation in the main mining area of the Pilbara in Western Australia is the most efficient, whereas Rio’s is number three.

On paper, the answer would appear to be to cut around $4 billion, or some 14% of the overall company’s annual costs, based on 2025 estimates. That would bring Rio’s margin in line with its larger peer’s and arguably persuade shareholders to bump up the enterprise’s valuation of five times EBITDA closer to the almost six times multiple BHP sports.
It’s not that simple. Rio’s mines are spread over a larger area and some are getting depleted. So the company has had to invest to keep the iron ore flowing and is slated to open one new mine a year in the region over the next four years.

That doesn’t mean Trott has no room to manoeuvre. He has already shown an ability to wring more out of the iron ore business during his four years in charge. The division has met its production target every year since he took the helm, after missing it in five of the previous seven years. The Gudai-Darri mine opened in 2022 is now producing 50 million tonnes a year, 16% more than its estimated yield.

Once he takes over from departing CEO Jakob Stausholm in just under six weeks’ time, Trott will have more power to improve both the iron ore operations as well as Rio’s other units – copper, aluminium and lithium. For the next few years, though, barring any major strategy changes, he’s unlikely to be able to do more than close just some of the gap with BHP.
Source: Reuters