Rio Tinto Rewards Investors as Profit Rebounds on Iron Rally

  • Iron ore surged 81% last year as China stimulus spurred demand
  • Dividend beats analysts expectations; $500 million buyback

Iron Ore Leads Mining Turnaround, Boosts Rio Tinto

Rio Tinto Group will pay a much higher dividend than expected and buy back $500 million of shares after the world’s second-biggest mining company reported the first gain in annual profit since 2013.

Higher iron ore prices boosted underlying profit 12 percent to $5.1 billion in 2016, London-based Rio said on Wednesday. That beat the $4.75 billion average estimate of analysts compiled by Bloomberg.

The dividend fell 21 percent to 170 cents a share, reflecting a new policy aligning the payout to earnings. Still, that exceeded the average estimate of 136 cents in the Bloomberg survey and the company’s minimum payout of 110 cents. Rio will purchase U.K.-listed shares throughout this year.

“What a difference a year makes,” Peter O’Connor, an analyst at Shaw & Partners Ltd. in Sydney, said in a note. “It’s been a long grind back from the global financial abyss that Rio slumped into. But it certainly looks and feels like the ’old school’ Rio swagger is back.”

The global mining industry is rebounding from a downturn that forced some of the top producers to sell assets, cut costs and rein in spending after years of over-investment bloated balance sheets and left markets oversupplied. Iron ore, Rio’s main profit driver, surged 81 percent last year as Chinese stimulus supported local steel output, leading to better demand for overseas ore.

Jean-Sebastien Jacques on Feb. 8.

Photographer: Simon Dawson/Bloomberg

“Rio is in good shape today,” Chief Executive Officer Jean Sebastien Jacques said on a call with reporters after the results. “We have kept our promises. We have delivered cost savings. We have strengthened the quality of our portfolio. We are investing for the long term and at the same time we have strengthened our balance sheet.”

The company is in a “strong position to deliver superior shareholder returns,” he added.

Shares Rebound

Rio shares rebounded from a seven-year low to rally 60 percent in London in 2016. The stock is up 9 percent this year and reached an almost four-year high in late January. The Sydney-traded shares rose 0.8 percent to close at A$65.69 on Wednesday.

Prices for iron ore delivered to China are near a two-year high. The main question for Rio and competitors including BHP Billiton Ltd. and Vale SA is whether the rally can be sustained.

“The government has implemented stimulus packages for some time now and we believe they will continue, especially in the context of the leadership conference scheduled for the fourth quarter in Beijing,” Jacques told reporters. “The property and construction market is doing pretty well. As far as China is concerned, we do not have a big issue today."

Banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. are seeking to gauge how easily new low-cost supply will be absorbed and if higher prices will prompt additional output.

There are signs that Chinese customers are well stocked. Inventories at Chinese ports reached a record last week and shipments from Australia’s Port Hedland hit an all-time high for the month of January.

Shortly before taking over the CEO role from Sam Walsh in July, Jacques outlined his vision to grow the company through investing in existing projects and expanding profitable operations, rather than focusing on deals.

Jacques is leading the 144-year-old mining giant’s retreat from coal as part of a broader plan to slim Rio’s asset base that has resulted in $7.7 billion of disposals since 2013.

Last month, he agreed to sell most of the company’s thermal coal assets to a firm controlled by China’s Yanzhou Coal Mining Co. for $2.45 billion. The sale, which would leave Rio with just two remaining coal mines once completed, had raised expectations of bigger returns to shareholders.

Rio’s net debt fell 30 percent to $9.6 billion at the end of last year. The coal disposal could help reduce borrowings to $3.9 billion by the end of 2017, Deutsche Bank AG has said.

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