Rio Tinto Group (RIO) Chief Executive Officer Sam Walsh is charting a course to potentially bolster cash returns to investors in the world’s second-biggest mining company after cutting $2 billion of costs ahead of schedule.
“What I’ve done for the board is to provide them options, options to pay down debt, options to pay dividends and so on,” the 63-year-old Australian said Dec. 17 in an interview at Rio’s London headquarters. “The optionality will most definitely be there. Exactly how the board determines to make shareholder returns and the amount -- that’s up to the board.”
The 22-year company veteran has slashed costs, curbed spending plans and driven productivity gains since becoming CEO in January amid an industrywide push to preserve profitability as some commodity prices slide. Rio could return as much as $3 billion of surplus cash to investors in 2016, Goldman Sachs Group Inc. analysts said this month.
“There’s no point in reducing costs, there’s no point reducing your capital allocation unless it actually flows through to your bottom line and flows through to your debt and flows through to your earnings,” said Walsh, who previously headed the company’s iron-ore unit, its most profitable division. “It provides us with options, what we’ve actually achieved.”
Rio dropped 0.2 percent to 3,248.5 pence by yesterday’s close in London, where the stock has retreated 7.5 percent this year.
Rio, which reported a $3 billion net loss for 2012 after writing down the value of acquisitions, may choose to return cash through special dividends or a share buyback, Credit Suisse Group AG analysts wrote Dec. 3. Planned reductions in net debt to about $15 billion by the end of 2014 suggest surplus cash beyond its usual dividend could be paid out in the first half of 2015, UBS AG analysts said Dec. 12.
Rio paid about $3.3 billion in dividends for 2012, or $1.67 a share, 15 percent more than a year earlier. Rio completed a $7 billion share buyback during the first half of last year.
Walsh told investors in London last week that the company had completed a drive to trim costs by $2 billion this year one month ahead of schedule. The initiative is part of a wider objective to reduce expenses by a total of $5 billion over two years, a plan where Rio now has “rolling momentum,” Walsh said in this week’s interview.
“We continue to believe capital management is a realistic prospect for Rio in 2015, which we regard as a new positive to the investment case,” JPMorgan Chase & Co. (JPM) analysts Lyndon Fagan and Dominic O’Kane wrote in a Dec. 12 report. “Sustaining the progressive dividend is key, but the priority for 2014 is likely to be paying down debt, thereby allowing the board to make decisions on capital management in due course.”
The world’s largest mining companies are reining in spending after a decade-long boom in metal prices petered out. Glencore Xstrata Plc (GLEN) CEO Ivan Glasenberg said in February his peers had “really screwed up” by over-investing and swamping the industry with new mines and production.
Vale SA, the biggest iron ore producer, this month slashed its investment budget for a third straight year to $14.8 billion, the lowest since 2010. Rio Tinto revealed this month it plans to cut capital spending to about $8 billion in 2015, less than half its outlay last year.
The reduction will help Rio strengthen its balance sheet and cut net debt that rose to about $22 billion at June 30, Chief Financial Officer Chris Lynch said earlier this month. Reducing debt will be a priority for next year, he said.
Rio has written down more than half of the value of its $38 billion takeover of Canadian aluminum producer Alcan Inc. in 2007, a deal that ultimately resulted in the removal of Walsh’s predecessor Tom Albanese this year. It also took a $2.9 billion impairment charge in February on an acquisition of almost $4 billion for coal assets in Mozambique.
“Somehow we lost our way in relation to our acquisition ability,” Walsh said. “But the fundamentals are still very sound. My job really was to blue print us back to what we used to do very well.”
The company’s appetite for mergers and acquisitions remains diminished as it moves on from “dreadful mistakes” of the past, Walsh said in the interview. The company is not currently looking at any deals and will return to M&A “down the track,” he said.
He dismissed the likelihood of a Glencore-Rio Tinto combination.
“People make all sorts of wild statements; I focus on running our business, and running our businesses as we should and I suspect that right now Ivan is doing exactly the same,” Walsh said, referring to the Glencore CEO. “I’m just thinking of two elephants in a single bed, how do you actually make that work without one falling out?”
Rio and BHP Billiton Ltd. (BHP), the world’s biggest mining company, abandoned an agreement in 2010 to combine their Australian iron-ore operations following objections from regulators in Europe and Asia.
“You need to recognize that getting two elephants in a single bed is not as easy as it sounds,” Walsh said. “The job right now is to really re-focus the business, turn the business around, improve and strengthen the balance sheet, get your costs in line and it would not be helped by rushing out and doing some transaction.”
The world’s second-biggest iron ore exporter reported net income of $1.7 billion for the first half and increased the dividend by 15 percent to 83.5 cents. A planned expansion of its iron ore operations in the Pilbara region of Western Australia will cost $3 billion less than previously expected, Rio said last month.
As head of the company’s iron-ore division, Walsh generated almost $40 billion in profit over seven years amid record prices for the steelmaking raw material.
“I’m working on a near-term plan that’s five years, that’s beyond my time horizon, but it’s setting up things for my successor because I think that’s important,” Walsh said.
In January he was appointed for three years and described by Credit Suisse Group analysts that day as a “shorter-term CEO.”
“I’ve made the comment that I’m here for as long or short as the board actually wants,” Walsh said. “If they want me here longer I will be here. If they want me here shorter I will disappear into the sunset and be doing something else. I’m not retiring in the near future.”
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