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

By Jesse Riseborough and David Stringer  

Rio Tinto Group (RIO), 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.
“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.”
Rio advanced 2.5 percent to 3,475 pence in London trading by 8:17 a.m. It gained 0.8 percent to A$66.32 in Sydney before the earnings announcement.

Photographer: Simon Dawson/Bloomberg

Sam Walsh, chief executive officer of Rio Tinto Group.

“It’s a very, very strong headline number and well above the company’s own guidance,” Evan Lucas, a markets strategist in Melbourne at IG Ltd., said today by phone. “The iron-ore performance is strong and the copper performance looks very good indeed.”

Share Buyback

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.

Met Target

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.
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.
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. It 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.