Rio Tinto lifts dividend as earnings soar
• Commodity prices drive full-year revenue up 18.3%
Rio Tinto handed out a record dividend on Wednesday and predicted global manufacturing growth would drive further returns after stronger commodity prices helped the miner to its highest annual profit in three years.
All the big miners have recovered from the commodity crash of 2015-16, but Rio Tinto has emerged with the strongest balance sheet and a pile of cash, raising the question of what it can do to grow when the most obvious resources have been mined. Its full-year dividend of $2.90 a share — equal to about $5.2bn — was up 70% from last year and reflected higher prices for iron ore, aluminium, copper and coking coal.
Rio Tinto, which also announced an additional $1bn share buyback, reported a 69% jump in underlying earnings for calendar 2017 to $8.63bn, roughly in line with analyst estimates of $8.74bn compiled by Thomson Reuters. “All in all, we believe that we’ll be able to generate a lot of cash this year,” CE Jean-Sébastien Jacques told reporters on an earnings call.
“The strength of our balance sheet means we are ideally placed to deal with any economic volatility, invest in high value growth and retain the optionality for smart mergers and acquisitions.”
Rio, which more than halved its net debt to $3.8bn, said that higher commodity prices helped drive full-year revenues up 18.3% to $40bn.
The record dividend follows Rio’s decision to abandon its progressive dividend policy in 2016 when markets were much weaker and other companies scrapped dividends altogether.
Under the new policy, the company pays out 40%-60% of underlying earnings throughout the cycle.
Chief financial officer Chris Lynch said that Rio had for a second year paid out at the high end of the range and the new policy was “a great shareholder return story”.
Analysts agreed the results were strong, although the share price was barely moved in London trade and slightly down since the start of 2018 on a broader market sell-off.
Portfolio manager Andy Forster at Argo Investments in Sydney said it was a solid result. “Dividends that are bigger than the market expected and it increased the buyback an incremental $1bn, that’s pretty positive,” he said. “The quality of their product has attracted a premium and they have done well on costs, though that is probably starting to get more challenging going forward.”
Chinese demand, especially for the high-quality iron ore Rio Tinto can deliver and which is less polluting, has been a spur.
Rio Tinto has grabbed more market share in China as the country’s steel makers respond to a crackdown on pollution. Iron ore, Rio’s biggest income generator, contributed $6.69bn in full-year underlying earnings, nearly 70% of the total. Average prices for the steel-making ingredient rose 20% in 2017 from 2016, the miner said.
Australia’s government has forecast a 20% fall in average iron prices in 2018 on rising supply and moderating Chinese demand, but that is out of step with private forecasts, such as UBS and Citigroup, which see smaller reductions.
Rio maintained its 2018 capital expenditure forecast at about $5.5bn, while keeping its 2018 production guidance intact after raising its iron ore shipments target by 10-million tonnes in January. Its growth projects include the giant Oyu Tolgoi copper mine in Mongolia.
It has also said Africa is the largest untapped source of growth. On the sidelines of the African Mining Indaba in Cape Town it said that in 2018 its board would consider a potential $450m investment in expanding infrastructure near the Richards Bay terminal.
Jacques acknowledged the market volatility and short-term risk in China but said the miner had confidence in that country and said global manufacturing was growing.
“China is the main customer in relation to the mining business [but] the GDP is pretty strong across all geographies. Mining is a GDP-driven industry so today we are in a good space.”
THE STRENGTH OF OUR BALANCE SHEET MEANS WE ARE IDEALLY PLACED TO DEAL WITH ANY … VOLATILITY