Rio Tinto, Other Miners Get Pickup From Prices
February 04 2017 - 06:15PM
Dow Jones News
By Rhiannon Hoyle
SYDNEY -- Rio Tinto PLC is facing a problem that few would have
anticipated a year ago: what to do with all its cash.
After an increase in prices of everything from iron ore to
copper, the world's No. 2 mining company, and its rivals, are
enjoying an unexpected recovery and analysts expect that they could
take advantage of the market rebound to reward loyal investors.
Market investors are anticipating a bounce in returns broadly
from the mining sector, and share prices have surged higher as a
result. The S&P/TSX Global Mining Index, a gauge of miners'
performance, is up 70% over the past year.
Swiss miner and trader Glencore PLC already said in December it
plans to reinstate payouts to investors in 2017 after selling
assets and paying down debt. Investors and analysts hope other
miners such as Rio Tinto may be considering a special dividend or
even a share buyback to reward investors, although that may not
happen until later in the year once executives are comfortable with
the market's recovery.
For Rio Tinto, the windfall should allow Chief Executive
Jean-Sébastien Jacques, seven months into the job, to better stamp
his strategy on the mining giant. Investors will be watching
closely to see how the miner balances paying down debts, handing
out dividends and reserving cash for a rainy day when it releases
its annual earnings on Wednesday.
"The focus on shareholder value is sharper than ever before,"
said Nicki Ivory, Deloitte's Australian mining leader.
The Anglo-Australian giant is expected to post an annual profit
of US$5.18 billion for 2016, versus a net loss of US$866 million in
the year prior, according to the median of eight analyst forecasts.
RBC Capital Markets estimates Rio Tinto added US$1.1 billion in
cash to its balance sheet in 2016. In addition to better prices, a
continuing campaign to improve productivity is bearing fruit.
Rio Tinto is projecting that over the next five years it can
generate US$5 billion in additional free cash flow -- a measure of
cash generated from operations minus investments -- just from the
push to improve its mines.
RBC is among those forecasting spare cash from 2016 will be
directed toward dividends and debt. It is projecting a US$1.53
dividend, above Rio Tinto's target of at least US$1.10. Canaccord
Genuity has a US$1.30 estimate for 2016 and a US$1.88 forecast for
2017.
Debt reduction will certainly remain a focus for Rio Tinto and
its peers, many of whom were scrambling to shore up their balance
sheets when the China-led commodities boom collapsed.
Net debt for the world's top six diversified miners dropped to
US$89 billion in 2016 from US$110 billion the year prior, and is
likely to be cut to roughly US$70 billion by the end of 2017,
Credit Suisse predicts.
Mining executives are continuing to operate as though markets
are weak, investors say. Few expect companies to resume their
free-spending ways that characterized the industry's boom
years.
Miners also won't want to overextend themselves as they begin to
turn their attention to growth. Rio Tinto is already advancing
iron-ore and bauxite developments in Australia and a copper mine in
Mongolia.
"It is a balancing act," said Deloitte's Ms. Ivory.
Nevertheless, miners have come a long way from the dark early
days of 2016, when prices were approaching what some executives had
earlier described as doomsday scenarios.
And, this has struck a hopeful note among analysts: "2016 was a
year of demand recovery and balance sheet repair, and 2017 should
be a year when miners begin to repay investors for five tough years
of underperformance through higher cash returns and ongoing capital
discipline," Credit Suisse said.
(END) Dow Jones Newswires
February 04, 2017 18:00 ET (23:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Rio Tinto (NYSE:RIO)
Historical Stock Chart
From Feb 2024 to Mar 2024
Rio Tinto (NYSE:RIO)
Historical Stock Chart
From Mar 2023 to Mar 2024