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As Profit Rebounds on Iron Ore Rally, Rio Tinto Rewards Investors

As Profit Rebounds on Iron Ore Rally, Rio Tinto Rewards Investors
After the world’s second-biggest mining company reported the first gain in annual profit since 2013, Rio Tinto Group will pay a much higher dividend than expected and buy back $500 million of shares.
London-based Rio said on Wednesday that higher iron ore prices boosted underlying profit to $5.1 billion in 2016. This was more than the $4.75 billion average estimated by analysts.
Reflecting a new policy aligning the payout to earnings, the dividend fell 21 percent to 170 cents a share. Still, the company’s minimum payout of 110 cents and the average estimate of 136 cents in the Bloomberg survey were exceeded by it. Throughout the course of this year, Rio will purchase U.K.-listed shares.
After years of over-investment bloated balance sheets and left markets oversupplied, some of the top producers were forced to sell assets, cut costs and rein in spending, the global mining industry is rebounding from a downturn. Better demands for overseas ore resulted as Chinese stimulus supported local steel output and consequently Iron ore, Rio’s main profit driver, surged 81 percent last year.
“Our value over volume approach, coupled with a robust balance sheet and world-class assets, places us in a strong position to deliver superior shareholder returns through the cycle,” Chief Executive Officer Jean Sebastien Jacques said in the statement.
Rio shares rallied 60 percent in London in 2016 as they rebounded from a seven-year low. Reaching an almost four-year high in late January, the stock is up 9 percent this year. By the close of trade on Wednesday, the Sydney-traded shares rose 0.8 percent to A$65.69.
Residing near a two-year high are prices for iron ore delivered to China. For Rio and competitors including BHP Billiton Ltd. and Vale SA, whether the rally can be sustained is the main question.
Seeking to gauge how easily new low-cost supply will be absorbed and if higher prices will prompt additional output are banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc.
Chinese customers are well stocked as revealed by signs from the industry there. Shipments from Australia’s Port Hedland hit an all-time high for the month of January and inventories at Chinese ports reached a record last week.
Jacques outlined his vision to grow the company through investing in existing projects and expanding profitable operations, rather than focusing on deals shortly before taking over the CEO role from Sam Walsh in July.
As part of a broader plan to slim Rio’s asset base that has resulted in $7.7 billion of disposals since 2013, Jacques is leading the 144-year-old mining giant’s retreat from coal.
A firm controlled by China’s Yanzhou Coal Mining Co. for $2.45 billion was chosen by him last month to sell most of the company’s thermal coal assets. Expectations of bigger returns to shareholders have been raised by the sale which would leave Rio with just two remaining coal mines once completed.
At the end of last year, Rio’s net debt fell 30 percent to was $9.6 billion. Deutsche Bank AG has said that the disposal could help reduce borrowings to $3.9 billion by the end of 2017.

Christopher J. Mitchell

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