Rio Tinto Mines Recovering Prices -- WSJ
August 01 2016 - 03:03AM
Dow Jones News
By Rhiannon Hoyle
SYDNEY -- When Rio Tinto PLC six months ago abandoned a promise
to maintain or increase investor payouts year after year, minerals
prices were in a slump. Then-Chief Executive Sam Walsh said he
couldn't run the business on hope of a rebound.
Prices for its main commodities -- including iron ore, coal and
copper -- have since bounced back. Aided by robust demand and a
slowdown in mining growth, the S&P GSCI Industrial Metals index
climbed roughly 8% by the end of the first half.
That improvement, which caught many forecasters by surprise,
should feed through to better-than-anticipated earnings for top
miners such as Rio Tinto and BHP Billiton Ltd. Rio Tinto's
half-year profit report on Wednesdaywill be the first delivered by
new CEO Jean-Sébastien Jacques, who took the helm in early
July.
"In the early part of this year there was near panic over
balance sheets, as if the market felt half the listed mining sector
was going to go bust, " said Neil Gregson, natural-resources fund
manager at J.P. Morgan Asset Management. "Now, the market is trying
to price in moderately improving commodity prices rather than
asking, where is the floor?"
Rio Tinto, which two years ago was fending off an advance from
rival Glencore PLC, has garnered attention for how it has been
navigating the commodities downturn, with analysts saying its
balance sheet is stronger and its mines generate more cash than
rivals.
Citigroup this month upgraded its 2016 earnings-per-share
forecast for Rio Tinto by almost 10% after raising price estimates
on everything from coal to aluminum.
It has made for a rosier picture for Rio Tinto's top ranks than
was the case in February, when a retreat on its old dividend policy
was accompanied by a net annual loss and strong rhetoric on the
state of the sector. "I don't think anybody predicted what is
happening in the world economy today," Mr. Walsh said at the
time.
Still, it is unlikely Rio Tinto will yet be willing to plump
payouts more than anticipated.
Mr. Jacques recently projected commodity markets would remain
challenging for years to come. Prices have been volatile and
several analysts say iron ore, Rio Tinto's top money-spinner, could
head to fresh decade lows later this year because of rising mine
supplies as new operations in Australia and Brazil ramp up.
"I don't think there will be a clamor to reinstate a higher
level of dividend," said Mr. Gregson, whose funds manage about US$2
billion in assets, including Rio Tinto shares.
UBS AG forecast a full-year payout of US$1.10 a share from Rio
Tinto, in line with the minimum the miner forecast earlier this
year and roughly half what it paid last year.
Instead, the company is more likely to use its cash tackling two
other investor bugbears -- high debts and longer-run plans for
growth.
Rio Tinto has been somewhat of an outlier in its pursuit of
production growth, with projects including an underground copper
mine in Mongolia and a bauxite mine in Australia under way.
Some competitors remain in a tougher spot.
Anglo American PLC, in particular, has been undertaking a
drastic restructuring that includes unloading many of its mines to
steady its ship. On Thursday, it reported a net loss of US$813
million for the first half. On the same day, Vale SA posted a 34%
decline in net profit for its second fiscal quarter.
Rio Tinto is expected to report an underlying first-half profit
of about US$1.56 billion, versus US$2.92 billion a year ago,
according to the median of five analyst forecasts.
Some money managers say they would still like to see better
balance sheets before Rio Tinto, or its Anglo-Australian rival BHP,
splash too much cash on growth. Repaying debts has been an
industrywide problem after companies spent big to expand their
operations, chasing China's rising demand.
"The large two miners still have a significant amount of debt on
their balance sheet," said Prasad Patkar, an investment manager at
Platypus Asset Management, which manages roughly 2 billion
Australian dollars (US$1.5 billion) in assets.
Rio Tinto bought back some bonds in the first half of the year
and Citi estimates net debt will drop to US$11 billion at the end
of this year, versus US$13.8 billion at the end of 2015.
"This," Citi wrote in a July 11 note, "could create the
potential for higher payout ratios or capital management in
2017."
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
(END) Dow Jones Newswires
August 01, 2016 02:48 ET (06:48 GMT)
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