Rio Tinto Rewards Investors After Return to Profit
February 08 2017 - 5:16AM
Dow Jones News
By Rhiannon Hoyle
SYDNEY-- Rio Tinto PLC said it would buy back shares worth
US$500 million and pay a higher-than-expected dividend after
returning to profit in 2016, moves that sent its shares higher amid
deepening confidence that the global mining industry has turned a
corner.
The Anglo-Australian miner is emerging from a deep downturn in
the resources sector in better shape than many of its peers owing
to an unexpected sharp recovery in commodity prices last year and
an aggressive campaign to cut costs and boost efficiency at pits
from the U.S. to the Australian Outback.
An annual profit of US$4.62 billion marks a turnaround in
fortunes for a company that made a US$866 million loss a year ago
and was forced to junk a prized progressive dividend policy, which
promised stable or rising returns, to conserve cash.
On Wednesday, Rio Tinto said it would pay an annual dividend of
US$1.70 a share after a recovery in prices of its key products
including iron ore, copper and coal left it with a large cash
surplus. That was well above the US$1.395-a-share forecast by
analysts polled by The Wall Street Journal and Rio Tinto's stated
commitment to pay a minimum US$1.10 a share dividend.
Rio Tinto's plan to buy back a chunk of its London-listed stock
was a further surprise as analysts had expected the miner to wait
until later in the year, at least. The company's shares rose 3%
after the result, which included a 12% rise in underlying earnings
to US$5.10 billion.
"We wanted to make sure we sent a strong signal to our
shareholders that we meant what we said," Chief Financial Officer
Chris Lynch said. When Rio last year scrapped its progressive
dividend policy, it laid out intentions to boost returns in times
of strong earnings and cash generation.
Still, the dividend was the miner's weakest since 2012, and down
on last year's US$2.15-a-share.
Rio Tinto, which was a takeover target for Swiss commodities
trader Glencore PLC as recently as 2014, has been reducing its
focus to a smaller group of assets that it can run more profitably.
The company recently agreed to sell Coal & Allied Industries
Ltd., which accounts for more than half of its coal production, to
China-backed Yancoal Australia Ltd. for up to US$2.45 billion. It
also sold off a Scottish aluminum smelter and this week agreed to
gift its halted Bunder diamond project in India to the government
of Madhya Pradesh state.
That strategy, which helped to reduce annual operating costs by
US$1.6 billion last year, has strengthened its cash flow and
enabled management to repay debt as well as bolster shareholder
returns. Mr. Lynch said he's eager to pay down more debt, even
after a 30% reduction in net debt in 2016 to less than US$10
billion.
"I want to get the strength fully cemented into the balance
sheet," he said.
Rio Tinto said it also has flexibility to invest in new projects
even if commodity prices soften, although the company's track
record in doing deals is patchy with the value of many assets later
written down. The miner currently faces separate regulatory probes
over African iron ore and coal deposits acquired several years
earlier, which could hurt it materially in future.
Mr. Lynch said there was no way to quantify the potential future
cost of the investigations and any possible litigation, with a
board committee established to keep those regulatory issues under
review.
The price of iron ore, which accounts for most of Rio Tinto's
earnings, roughly doubled last year from a more-than decade low
because of robust demand from China's steel industry and slowing
growth in global mine output. Prices of other commodities including
coal and copper also rose.
"This time last year was dead set one of the worst mining
reporting seasons I can remember," said Evan Lucas, a
Melbourne-based analyst at broker IG. "I don't think, even in their
wildest dreams, the miners foresaw the turnaround that has since
occurred."
The S&P/TSX Global Mining Index, a gauge of miners'
performance, is up 60% over the past year, with investors tipping a
recovery in returns more broadly. Glencore, which scrapped
dividends amid the downturn, said in December that it plans to
reinstate investor payouts in 2017.
"Am I concerned today about China? The answer would be no," said
Chief Executive Jean-Sébastien Jacques, who took over from Sam
Walsh in July . He said the construction market is holding up well
and that he expects more stimulus from Beijing to support economic
growth. China is the world's biggest buyer of commodities such as
iron ore and copper.
Mr. Jacques said it is too early to judge the impact of new
President Donald Trump on the U.S. economy, but "clearly there are
some positive signals in relation to infrastructure and company
tax."
Still, the miner is cautious about the outlook for Europe. "The
strong balance sheet is the greatest preparation we can have for
any volatility that could be there in markets," Mr. Lynch said.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
(END) Dow Jones Newswires
February 08, 2017 05:01 ET (10:01 GMT)
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