Rio Should Boost Dividends as Cash Gains, RBS Says

(Corrects RBS profit estimate in fifth paragraph.)

Rio Tinto Group, the world’s third- largest mining company, should consider increasing its dividends because of its improving cash position, Royal Bank of Scotland Group Plc said.

“We believe the company is in a position to look at capital management,” analysts led by Lyndon Fagan said yesterday in a report. “Our preferred method of deploying cash would be through a material and sustainable increase in dividends.”

Rio, the world’s second-largest iron ore producer, yesterday reported a 6 percent gain in iron ore production in the December quarter to a record 50.1 million metric tons. The London-based company may wait until it announces its first-half profit in August before announcing any capital management plans, Fagan said.

The company is more likely to buy back its London-traded stock, which is trading at a discount to its Sydney-traded shares, he said. “Although Rio has said nothing as yet on this.”

Rio has moved from an “uncomfortable gearing level towards a net cash position,” he said. The company will hold cash of $28 billion next year, RBS said. The bank cut its net profit forecast for 2010 by 4 percent to $14.03 billion because of the rising Australian dollar and increasing costs in producing coal and iron ore. It also cut its 2011 forecast by 4 percent to $19.1 billion.

Floods in Queensland forced Rio to declare force majeure at four coal mines. This won’t be a “significant 2011 earnings impact,” Credit Suisse Group AG analyst led by Michael Shillaker said yesterday in report.

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