Don't Be Blinded by Rio Tinto's Cash

There could be a long winter ahead after this early Christmas present.
Carla Gottgens/Bloomberg
At Closing, June 15th
4219.50 GBp

Rio Tinto Group's first-half results represent a stunning rebound for any shareholders who've spent five years griping about mining companies' inability to generate proper returns.

Analysts had predicted a dividend in line with Rio's forecast in February that it would hand out between 40 percent and 60 percent of net income. The payout came in at $1.10 -- equivalent to about $2 billion -- and, just for good measure, Chief Executive Officer Jean-Sebastian Jacques layered a $1 billion share buyback on top, bringing the total to about 75 percent of earnings.

That level of payment is looking more sustainable than it has for a while. Despite the past year's dramatic recovery in earnings, Rio Tinto has only just climbed out of the payout pit it fell into during the mining boom. Until Wednesday's results finally nudged earnings ahead of dividends, the period since the end of the 2013 fiscal year saw Rio give more to shareholders than it received in aggregate as net income from operations. Now the company is making retained profits again.

Climbing Out of the Pit

Rio Tinto has only just made it back to aggregate retained profits after a three-year slump

Source: Bloomberg

Note: Aggregate retained profits calculated as rolling sum of net income since December 2013, minus rolling sum of dividends paid over the same period.

In another sense, though, this sort of boon to equity investors can't last. It stands to reason that if Rio Tinto is promising to pay out 40 percent to 60 percent of earnings, a 75 percent ratio should be considered an outlier.

That's particularly the case when capital outlays will probably be increasing in the near future, especially as the likes of Glencore Plc return to their heavy-spending ways with an offer for the grains trader Bunge Ltd. and a stake in the coal mines that Rio Tinto itself is selling.

For the moment, long-standing rival BHP Billiton Ltd. is too busy fighting off activist shareholders to consider doing anything more aggressive than stroking its own investors -- but when that changes, Jacques will need to open his checkbook, too.


Rio Tinto is still an iron ore company in all but name, judging by the sources of its net earnings

Source: Bloomberg

Note: Net earnings represent income after tax but excluding finance costs.

This year, stronger prices for iron ore and aluminum are keeping Rio Tinto in the pink. But should that rally fade, there'll be no more cash flow from coal to fall back on. And its copper-mine stakes -- hit by strikes this year at Escondida in Chile and Grasberg in Indonesia, plus the vast cost of reaching full production at Oyu Tolgoi in Mongolia -- aren't producing enough earnings to make up the difference.

Wednesday's dividend payout represents a nice early Christmas present for shareholders. There could be a long winter ahead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    David Fickling in Sydney at

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