Rio Tinto Second-Half Profit Gains 43% as Iron Ore Rises

Rio Tinto Group, the world’s second-largest mining company, bolstered its dividend after reporting a 43 percent gain in second-half profit as prices for iron ore advanced and it beat a cost-cutting target.

Underlying profit rose to $6 billion in the six months ended Dec. 31 from $4.2 billion a year earlier, London-based Rio said today. That compares with the $5.1 billion average estimate of 8 analysts surveyed by Bloomberg. It increased its dividend by 15 percent to 192 cents a share for the year.

Since his appointment 13 months ago, Chief Executive Officer Sam Walsh has cut $2.3 billion in costs and curbed investment following criticism from investors that the world’s biggest mining companies had overspent on acquisitions and expansions. Analysts are now expecting Rio to bolster shareholder returns as cost-savings enhance earnings.

“It’s a strong signal with regards to capital allocation being sent by Rio with a 15 percent hike in the dividend,” Richard Knights, an analyst at Liberum Capital Ltd. in London, said today. “Rio has sent a clear message that it is listening to shareholders.”

Rio fell 0.4 percent to 3,497.5 pence by the close in London, with the volume of shares traded exceeding three times the three-month daily average. The FTSE 350 Mining Index was also 0.4 percent lower.

Shareholder Value

“That’s the real proof in the pudding that we are actually delivering greater shareholder value,” Walsh, a 64-year-old Australian, said today on a call with reporters referring to the dividend. “It’s also a tick in terms of the confidence we have in the business going forward.”

Iron ore is the biggest contributor to Rio’s results, followed by copper. The price of the raw material climbed 15 percent in the second half of 2013 as China, the world’s biggest buyer, boosted stockpiles to the highest in more than a year. The price has dropped 10 percent this year.

It plans to boost total production 11 percent this year to 295 million tons, Rio forecast today. Mined copper output will decline 10 percent this year after the company sold assets and because a of a smelter shutdown at its Kennecott Utah Copper operation.

Rio is the biggest iron-ore exporter after Brazil’s Vale SA. Increased supplies will trim prices this year, Walsh said in a December interview. Banks from Goldman Sachs Group Inc. to UBS AG expect supply expansions led by Australian producers to push the seaborne market into surplus in 2014.

‘Screwed Up’

The world’s largest mining companies are reining in spending after a decade-long boom in metal prices petered out. Glencore Xstrata Plc CEO Ivan Glasenberg said a year ago his peers had “really screwed up” by over-investing and swamping the industry with new mines and production. Rio’s Walsh is seeking to cut costs by a further $1 billion this year.

“We expect further dividend growth from Rio in the years ahead,” Chris LaFemina, an analyst at Jefferies LLC in London, said in a report today. “We expect the company to announce a $3 billion to $5 billion share buyback program when it reports full year 2014 results next February as its deleveraging process should be nearly complete by then.”

The company’s focused on reducing debt this year, which rose to about $22 billion at June 30, Chief Financial Officer Chris Lynch said today. It cut borrowings by $4 billion in the half to $18.1 billion. Rio plans to trim capital spending to about $8 billion in 2015, less than half its outlay in 2012.

Bolt-on Deals

“I think we can expect to see strong dividend growth,” Paul Gait, an analyst at Sanford C. Bernstein Ltd. in London, told Bloomberg Television. “That’s I think a very, very strong catalyst for the stock.”

The company isn’t studying any major acquisitions though may consider smaller so-called “bolt-on” deals, Walsh told reporters in London.

Rio revealed $14 billion of writedowns on the value of coal and aluminum deals a year ago, a move that led to Walsh’s predecessor Tom Albanese leaving the company. The head of mergers and acquisitions, Philip Mitchell, left last month after more than six years running business development.

The company took a $3.4 billion writedown for 2013, which includes a $1.3 billion impairment relating to its aluminum business. It took a $555 million charge on its Gove alumina refinery in Australia following a November decision to curtail production.

Underlying profit for the full-year was $10.2 billion, or 553.1 cents a share, from $9.3 billion, or 501.3 cents, a year earlier. That compares with the $9.7 billion average of 23 analyst estimates compiled by Bloomberg. Net income was $3.7 billion after a loss of $3 billion in 2012.

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