Rio Rewards Investors With More Cash on Iron Ore Rebound

  • Mining industry is recovering from commodities crisis of 2015
  • Profits miss analyst estimates, shares slip in London trading

Rio Tinto CEO Says Growth Is About Smart M&A

Rio Tinto Group promised shareholders bigger rewards as the world’s second-largest miner reaps the benefits of an iron ore rally.

Rio increased its share buyback by $1 billion this year and plans to pay a $2 billion interim dividend. The company reported earnings that more than doubled from a year earlier. Still, the shares slipped 2.1 percent as of 8:46 a.m. in London as some investors hoped for an even bigger payout.

“The company has promoted the view that it’s going to be a big returner to shareholders,” said Hunter Hillcoat, an analyst at Investec Plc in London. “Perhaps the market was looking for a little bit more. It wasn’t the knockout blow that people were expecting.”

The comeback in mining is gaining momentum following a crisis in 2015 that forced the top producers to sell assets, cut costs and rein in spending. With the industry still reluctant to spend a lot of money on new mines or deals, dividends and stock buybacks are becoming popular. Anglo American Plc surprised investors last week by reinstating its dividend.

Underlying profit increased to $3.94 billion in the six months through June, London-based Rio said in a statement Wednesday. That compared with $1.6 billion a year earlier and missed the $4.26 billion average estimate from analysts surveyed by Bloomberg.

Profits may have been weaker than some estimates as a result of a $2.5 billion bond buyback, a deferred tax charge of $144 million related to the Grasberg copper operation in Indonesia and a $176 million one-off payment following a strike at Chile’s Escondida mine, Chief Financial Officer Chris Lynch told reporters on a conference call.

Net debt fell to $7.57 billion from $9.59 billion at the end of 2016.

Resilient Iron Ore

Higher earnings at Rio should continue as iron ore’s rebound is matched by other commodities, said Adrian Prendergast, a Melbourne-based analyst at Morgans Financial Ltd.

“It’d be greedy to expect a lot more from iron ore and the resilience that the price has already shown,” he said. “There’s a real chance of the recovery phase broadening into other metals on improving demand conditions.”

Iron ore, Rio’s top moneymaker, has rallied since mid-June on slower additions to mine supply and rising imports in China. Demand is likely to remain steady over the next year, Fortescue Metals Group Ltd. said last week. Spot ore with 62 percent content in Qingdao declined 0.2 percent to $73.56 a dry ton on Tuesday, according to Metal Bulletin Ltd.

Read: ‘It Has to Come Down’: Iron Ore’s Rally Brings Out Naysayers

“We are pretty confident about China,” Chief Executive Officer Jean-Sebastien Jacques said on a call with reporters. “2017 has been and will be a very good year for China. When you look at the metrics, the early signs for 2018 and 2019 are positive.”

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE