Rio May Expand Buyback on Higher Prices, Analysts Say

Rio Tinto Group, the world’s third- largest mining company, may increase its $5 billion share buyback should the commodity price rally persist, analysts said.

“We see potential for this to be progressively increased with subsequent result announcements, especially given the strength of our forecast earnings,” Lyndon Fagan, a Sydney- based analyst at Royal Bank of Scotland Group Plc, said in a report. RBS estimates Rio’s profit at $18.8 billion in 2011.

The London-based mining company announced the buyback yesterday after an increase in iron ore and copper prices drove 2010 net income to a record $14.3 billion. The price for Chinese iron ore imports, an Asian benchmark, jumped 43 percent last year and reached $188 a metric ton yesterday, the highest since at least 2008, on higher demand from steel mills in the region. Copper on the London Metal Exchange rose 30 percent last year.

Rio may double its capital management plan, buying back $5 billion in shares this year and $5 billion next if iron ore prices remain high, Neil Goodwill, a Melbourne-based analyst at Goldman Sachs & Partners Australia Pty, said in a report yesterday. Rio’s cash flow is “stunning,” he said.

Rio yesterday said cash from operations swelled by 70 percent last year to a record $23.5 billion.

‘Carefully Judged’

“We’ve only just announced the $5 billion and you’re already asking us to look at another version,” Chief Financial Officer Guy Elliott told analysts yesterday regarding the possibility of a mid-year or end-of-year review. “We really have got no plans to do that. We think this $5 billion is very carefully judged.”

Rio raised its final dividend by 40 percent yesterday to 63 cents a share, bringing the full-year payout to 108 cents. The dividend forms the basis of a new “progressive” policy aimed at boosting the U.S. dollar value of payouts over time, Rio said. Rivals Vale SA and Xstrata Plc have also announced plans to raise their dividend as commodity price gains boost profits.

Rio advanced 1.6 percent to 4,623.5 pence at the 4:30 p.m. close of trade in London today. The stock earlier fell 1.6 percent to A$87.28 at the close in Sydney.

Rio said yesterday it planned to complete the buyback by the end of 2012 and would probably buy its London-listed shares because they trade at a discount to the Australian stock. The buyback is equal to about 2 1/2 months of operating cash flow, RBS’s Fagan said in yesterday’s report.

Alcan Acquisition

Rio halted its last buyback in July 2007 after agreeing to buy Alcan Inc. for $38.1 billion. At that point, the company had repurchased $5.4 billion of shares in a $7 billion program that began in 2006.

“While always a delicate balance, it is hard to consider the program announced as being particularly aggressive in light of the amount and duration flagged,” Macquarie Group Ltd. analysts wrote in a report today.

JPMorgan Chase & Co. analysts reduced their earnings estimates for Rio by 5 percent this year and next, citing expected higher costs in the iron-ore unit.

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Jesse Riseborough in London at jriseborough@bloomberg.net.

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net.

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