[LONDON] Rio Tinto Group, the world's second-largest mining company, bolstered its dividend after reporting a 43 per cent gain in second-half profit as prices for iron ore advanced and it beat a cost-cutting target.
Underlying profit was US$6 billion in the six months ended Dec 31 from US$4.2 billion a year earlier, London-based Rio said yesterday. That compares with the US$5.1 billion average estimate of eight analysts surveyed by Bloomberg. It increased its dividend by 15 per cent to 192 cents a share for the year.
Since his appointment slightly over a year ago, chief executive officer Sam Walsh has cut US$2.3 billion in costs and curbed investment following criticism from investors that the world's biggest mining companies had overspent on acquisitions and expansions. Analysts are now expecting Rio to bolster shareholder returns as cost savings enhance earnings.
"It's a strong signal with regard to capital allocation being sent by Rio with a 15 per cent hike in the dividend," Richard Knights, an analyst at Liberum Capital in London, said yesterday. "Rio has sent a clear message that it is listening to shareholders."
"That's the real proof in the pudding that we are actually delivering greater shareholder value," Mr Walsh, a 64-year-old Australian, said yesterday on a call with reporters referring to the dividend. "It's also a tick in terms of the confidence we have in the business going forward."
Iron ore is the biggest contributor to Rio's results, followed by copper. The price of the raw material climbed 15 per cent in the second half of 2013 as China, the world's biggest buyer, boosted stockpiles to the highest in more than a year. The price has dropped 10 per cent this year.
The outlook for the Chinese economy "remains positive", Mr Walsh said in a presentation yesterday.
Rio is the biggest iron ore exporter after Brazil's Vale SA. Increased supplies will trim prices this year, Mr Walsh said in a December interview. Banks from Goldman Sachs to UBS expect supply expansions led by Australian producers to push the seaborne market into surplus in 2014.
In a bid to placate increasingly vocal shareholders, the world's largest mining companies are reining in spending after a decade-long boom in metal prices petered out. Glencore Xstrata CEO Ivan Glasenberg said a year ago his peers had overinvested, swamping the industry with new mines and production. Rio's Mr Walsh is seeking to cut costs by a further US$1 billion this year.
"The cost-cutting combined with the capex ramp-down put Rio in a position to increase its returns," Deutsche Bank analysts Rob Clifford, Anna Mulholland and Paul Young wrote in a Feb 10 report. The company could return as much as US$3 billion of surplus cash to investors in 2016, Goldman Sachs analysts said in December.
Rio plans to cut capital spending to about US$8 billion in 2015, less than half its outlay in 2012. This year's focus will be on reducing debt, which rose to about US$22 billion at June 30, chief financial officer Chris Lynch said in December. It reduced debt by US$4 billion in the half year to US$18.1 billion.
Underlying profit for the full-year was US$10.2 billion, or 553.1 cents a share, from US$9.3 billion, or 501.3 cents, a year earlier. That compares with the US$9.7 billion average of 23 analyst estimates compiled by Bloomberg. Net income was US$3.7 billion after a loss of US$3 billion in 2012. - Bloomberg
