(Bloomberg) -- Rio Tinto Group, the world’s second-biggest mining company, plans to spend $2 billion in a share buyback after reporting full-year profit that beat estimates as higher output and lower costs countered a slump in commodity prices.
Underlying profit dropped 9 percent to $9.3 billion in the 12 months ended Dec. 31, London-based Rio said Thursday. That compares with the $8.97 billion average of 26 analysts’ estimate compiled by Bloomberg. Estimates for the buyback before the release ranged from $1 billion to $2.5 billion according to forecasts from five analysts compiled by Bloomberg.
The decision to buy back shares comes six months after Chief Executive Officer Sam Walsh described the company as a “cash machine” following a cost-cutting
program that helped improve profit margins. It also follows Rio’s decision to fend off the advances of smaller rival Glencore Plc, which approached it about a possible merger last year.
“The business is certainly healthy, the results are good and they delivered on what they said they were going to do but the outlook for me is not healthy,” Richard Knights, mining analyst at Liberum Capital Ltd. in London, said by phone. “The low-hanging fruit has been picked in terms of spending, cost reductions and releasing working capital. It will get more difficult from here as we expect continued top-line pressure.”

‘Tough Year’

This year will be a “tough year” for the global mining industry as it confronts a new phase of economic growth in China, Walsh told reporters on a conference call following the result.
Rio’s profit was crimped by the 47 percent collapse in the price of iron ore last year as a wave of new supplies from Australia compounded a glut of the steel-making raw material. Rio’s iron-ore unit delivered 87 percent of the group’s underlying profit last year.
“Our continued financial and operating discipline enabled us to offset much of the impact of lower commodity prices in 2014,” the 65-year-old Walsh said in the statement. “With lower commodity prices and uncertain global economic trends, the operating environment remains tough.”
Rio shares climbed 1.3 percent to 3,009.5 pence by 8:07 a.m. in London trading. In November, Walsh said Rio would “materially increase” returns to investors and today it raised its dividend 12 percent to 215 cents a share for the year.

Lower Costs

Net debt fell 31 percent, or $5.6 billion, to $12.5 billion at the end of last year. Declines in the oil price as well as a lower Australian dollar have helped Rio trim its mining costs. The company estimated a further cut to its costs of $750 million this year.
Spending will fall to less than $7 billion this year and remain at that level for the following two years, Rio said.
Miners will cut spending by $20 billion this year, according to Macquarie Group Ltd., as they scale back growth plans amid waning prices for metals. Producers invested $1 trillion in new mines and expansions since 2002 to take advantage of surging demand from China. At the same time as growth in the world’s second-biggest economy begins to slow, a global glut of metals is increasing, suppressing prices.
“The mining industry is adjusting to a new phase of economic development in China, which is likely to result in lower price levels compared with those seen during China’s years of capital-intensive growth,” Rio said in the statement. The company expects economic growth in the country to slow to 7 percent this year from 7.4 percent in 2014.

Iron Decline

Iron ore has extended its decline this year, falling 13 percent amid a widening glut. Ore with 62 percent content at Qingdao fell 0.3 percent to $62.18 a dry ton on Wednesday, according to Metal Bulletin. The price fell on Monday to $61.20, the lowest on record dating back to May 2009.
Analysts have been cutting forecasts. Goldman Sachs Group Inc. and UBS Group AG both cut their estimates to $66 a ton this year, while Citigroup Inc. reduced its to $58.
About 80 million metric tons of higher cost iron ore supply will exit the market this year, mainly outside China, Walsh said. As many as 85 million more tons are also at risk if smaller global producers can’t cut costs.
“There’s a limit to how long people can hang on by their fingernails,” he said. Rio, the lowest-cost producer, sees shipments in 2015 of about 350 million tons, it said in the statement.