Rio Tinto boosts cash returns as profit hits three-year high

Posted on 08 February 2018

Source: The Edge

Rio Tinto handed shareholders a record annual dividend on Wednesday as stronger commodity prices helped the global miner to its highest annual profit in three years, and pointed to strong momentum for the global economy.

Rio, which also announced an additional US$1 billion share buyback, reported a 69% jump in underlying earnings for calendar 2017 to US$8.63 billion, roughly in line with analyst estimates of US$8.74 billion, according to Thomson Reuters I/B/E/S.

Its full-year dividend of US$2.90 a share — equal to about US$5.2 billion — was up 70% from last year and reflected a surge in cash flow as prices for iron ore, aluminium, copper and coking coal all improved on the previous year.

"All in all, we believe that we'll be able to generate a lot of cash this year," Chief Executive Jean-Sébastien Jacques told reporters on an earnings call.

"The strength of our balance sheet means we are ideally placed to deal with any economic volatility, invest in high value growth and retain the optionality for smart M&A," he added.

Rio, which more than halved its net debt to US$3.8 billion, said higher commodity prices helped drive full-year revenues up 18.3% to US$40 billion.

"It's pretty solid result," said portfolio manager Andy Forster at Argo Investments in Sydney.

"Dividends that are bigger than the market expected, and increased the buy back, an incremental US$1 billion, that's pretty positive. The quality of their product has attracted a premium and they have done well on costs, though that is probably starting to get more challenging going forward."


Solid Chinese demand for commodities has been translating into handsome returns by big miners in the form of dividends and buybacks. Last year alone Rio's share buybacks totaled US$4 billion, partly supported by the sale of some coal assets.

Iron ore, Rio's biggest income generator, contributed US$6.69 billion in full-year underlying earnings, nearly 70% of the total. Average prices for the steel-making ingredient rose 20% last year from 2016, the miner said.

Rio Tinto has grabbed more market share in China as the country's steel makers turn to less polluting raw materials such as high grade iron ore amid a crackdown on pollution, and Jacques said the shift to high grade ore may be here to stay.

"I believe we could be close to a turning point in relation to a structural change in China which is very good for us," he said.

Australia's government has forecast a 20% fall in average iron prices this year on rising supply and moderating Chinese demand, but that is out of step with some private forecasts, such as UBS and Citi, which see smaller reductions.

Rio maintained its 2018 capital expenditure forecast at around US$5.5 billion, while keeping its 2018 production guidance intact after raising its iron ore shipments target by 10 million tonnes last month.

Jacques acknowledged market volatility and short term risk in China, but reiterated the miner's confidence in the world's top commodities consumer while noting a revival in global manufacturing growth.

"China is the main customer in relation to the mining business (but) the GDP is pretty strong across all geographies today. Mining at the end of the day is a GDP-driven industry so today we are in a good space," he said. 

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