Rio Tinto Set to Boost Returns After Profit Jumps by 21%

Rio Tinto Group, the world’s second-largest mining company, said first-half profit gained 21 percent on record iron-ore shipments, setting the stage for an increase in cash returns to investors from next year.

Underlying profit rose to $5.1 billion in the six months ended June 30 from $4.2 billion a year earlier, London-based Rio said today. That compares with the $4.5 billion average estimate of 10 analysts surveyed by Bloomberg. Rio raised its dividend by 15 percent to 96 cents a share.

Chief Executive Officer Sam Walsh has slashed more than $3 billion in costs as part of a plan to turn around the fortunes of Rio Tinto after a period marked by failed acquisitions, asset writedowns and lower metals prices. Rio has been selling assets and curbing spending in a move designed to both reduce debt and appease investors who have campaigned for increased returns.

“If they are going to return capital, it’ll probably come as a share buyback rather than as some form of dividend, given the approach to capital management that they’ve shown,” Evan Lucas, a markets strategist in Melbourne at IG Ltd., said by phone. “There’s always been lip service paid to the idea, it might be we are about to see that delivered on.”

Rio advanced 1.6 percent to 3,444 pence in London trading by 10:56 a.m. It gained 0.8 percent to A$66.32 in Sydney before the earnings announcement.

Share Buyback

“The solid foundation for growth that we’ve created will consistently deliver materially increased cash returns to our shareholders,” Walsh said on a call with reporters. “We are focused on increasing shareholder returns.”

Investors have started to refocus on growth and expansions rather than only concentrating on returns, Walsh said last month. Rio may announce a share buyback of $3 billion to $5 billion in February, Jefferies LLC said in February.

BlackRock Inc.’s Evy Hambro, who manages the $8 billion World Mining Fund, last week said mining CEOs should maintain their commitment to rewarding investors. It would be foolish to revert to “damaging strategies of the last cycle,” he said.

Rio won’t be studying any major mergers or acquisitions, Walsh said today. Spending on projects and expansions this year is expected to be about $9 billion, $2 billion below its previous projection. It plans to spend about $8 billion in 2015, less than half its outlay in 2012 and the years that followed.

Walsh, a 64-year-old Australian, replaced Tom Albanese, now CEO of Vedanta Resources Plc, in January last year following failed deals by Rio in coal and aluminum.

‘Pretty Unequivocal’

The company has beaten its cost reduction target of $3 billion by the end of this year compared with 2012 levels. It has reduced costs by $3.2 billion, and is now seeking to cut a further $1 billion by the end of 2015.

“I thought they’d hold back on talking about cash returns, but that’s pretty unequivocal that they are going to give returns,” Rob Clifford, a London-based analyst at Deutsche Bank AG, who has a buy rating on the stock, said by phone. “The cost performance is phenomenal, they’ve added another billion on, and you’ve got to think that that’s conservative. But even more than that, the capital cost reduction is staggering.”

Iron ore is the biggest contributor to Rio’s results, followed by copper, with almost 90 percent of its profit coming from the commodity last year.

The price of the raw material slumped 30 percent in the first half as global mine expansions led by Rio deepened a glut. The company, the biggest iron-ore exporter after Brazil’s Vale SA, plans to boost total production 11 percent this year to 295 million metric tons and estimates output of more than 330 million tons from next year.

Shared Chairman

Iron-ore prices will extend a drop through 2015 when an increase in supply is set to accelerate, Goldman Sachs Group Inc. said yesterday. The bank kept its forecast for the steelmaking ingredient at an average of $80 a ton in 2015 from $106 this year.

The company is focused on reducing debt this year, Chief Financial Officer Chris Lynch said in February. Next year’s concentration will be on bolstering returns to investors, Lynch said today. Rio cut borrowings by $1.9 billion during the six months to $16.1 billion, meeting Lynch’s previous target for debt to be in the “mid-teens” prior to considering boosting returns.

Walsh also today addressed concerns around both his tenure as CEO, currently set down for the three years that started in January last year, and the future of Chairman Jan du Plessis, who will be appointed to the same role at SABMiller Plc, the world’s second-biggest brewer.

“I’m happy to stay on as long or short as the board wants. I think we are delivering results and I think they’re happy with that and how we are progressing,” he said. “It is one of those things that I’m sure we’ll look at during next year.”

Du Plessis is “a very capable chairman,” is strongly committed to Rio and wants to remain on the board for several more years, Walsh said.

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