Rio Tinto to defy mining pain with big payout

A man walks through the entrance from the reception area of Rio Tinto’s head office in Melbourne. Rio Tinto is expected to star among the top five global miners with a return of billions of dollars to shareholders at its annual results.

Reuters/Melbourne/LondonRio Tinto is expected to star among the top five global miners with a return of billions of dollars to shareholders at its annual results, even as the firm is set to report its worst half-year profit since 2009. It will likely be all downhill for investors in the megaminers after Rio Tinto reports on February 12 as they are all tipped to report sharp slides in earnings, gutted by weaker prices for almost everything they produce. Iron ore will be the biggest source of pain, even though it remains the most lucrative product for Brazil’s Vale, Rio Tinto and BHP Billiton, and investors’ main concern is how the big miners are going to shore up cash flow. The top three producers have wounded the industry by flooding the market with new supply, knocking iron ore prices down nearly 50% in 2014, a steeper slide than anyone anticipated. While boosting output, Rio has bolstered its cash flows by slashing costs, cutting capital spending and reducing debt, putting it in the best position to return cash to shareholders. BHP took the same steps, but has been whacked by plunging oil prices. “In our opinion Rio has significantly greater flexibility (than BHP) at this point in time to pursue short-term capital management initiatives,” said Ben Lyons, a portfolio manager at ATI Asset Management. Forecasts for a capital return, probably through a buyback of Rio’s UK-listed shares, range between $1.5bn and $3bn, after Chief Executive Sam Walsh promised to “materially increase” returns. “I think it will have to be big because Sam doesn’t generally surprise on the downside. I think that is has to be punchier if it wants to achieve its purpose,” said Paul Gait, an analyst at Bernstein in London. That purpose is to satisfy investors enough to ward off any fresh takeover approach from Glencore Plc CEO Ivan Glasenberg, who was rebuffed by Rio last year and could come back with a new offer after April 8, under UK rules. The key question is how sustainable this is if Rio also sticks to a promise to pay a stable or higher dividend with every result. Analysts said it would not be taken well if Rio had to take on more debt to fund the big increase in returns following the end of a huge expansion programme, and Standard & Poor’s has warned Rio’s ‘A-’ rating could be at risk if its debt rose sharply to fund shareholder distributions. “What everyone has been promised is that after this $20-$25bn spending spree you would just be in the mother of all cash machines. If it’s being funded from the balance sheet, it does not feel like this is the mother of all cash flow engines,” said Gait. Like Rio, BHP has also promised a progressive dividend, a policy analysts say may be difficult to sustain if commodity prices remain weak across its four main sectors and after BHP spins off its aluminium, manganese, silver and some coal assets into a separate company, called South32, by June.