By David Stringer
Nov. 28 (Bloomberg)
Rio Tinto Group, the world’s second- biggest miner, flagged a boost in cash returns to investors after joining its biggest rival in cutting spending and operating costs.
The London-based company deferred plans to approve a new $1 billion Australian iron ore mine and lowered its 2014 expenditure estimate to less than $8.5 billion, the lowest since 2010 and below its August forecast of $9 billion.
“Without capital expenditure cuts they would’ve been eating into capital to maintain their dividends next year, so it’s very important that they’ve delivered on that,” Michael McCarthy, chief strategist at CMC Markets in Sydney, said by phone. “It’s a sensible approach in the current environment.”
With tumbling commodity prices, giving more cash to investors is seen as part of Rio’s strategy to bolster support from holders after rebuffing a merger bid from Glencore Plc. Chief Executive Officer Sam Walsh pledged in August the company would become a “cash machine” for shareholders.
“There’s a clear focus behind everything we do,” Walsh told investors today at a Sydney seminar. “Our goal is to deliver strong and sustainable shareholder returns.”
Investors have been focused on the prospect of Rio delivering higher cash returns “in the face of what looks like an absence of excess cash,” JPMorgan Chase & Co. analysts led by Lyndon Fagan said in a Nov. 26 note.
Cash Returns
The producer, which raised its first-half dividend 15 percent to 96 cents a share, will announce further increases to cash returns in February, Chief Financial Officer Chris Lynch said today. The “quantum and form” will be determined by the board, he said.
BHP Billiton Ltd., the world’s biggest miner, this week announced capital outlays will drop to $13 billion in fiscal 2016, down more than 40 percent from 2012.
Rio shares were up 0.6 percent at $58.34 as of 11:04 a.m. in Sydney trading, narrowing their decline this year to 14 percent. The S&P/ASX 200 index fell as much as 1.4 percent and BHP declined as much as 4.2 percent.
Shareholders of Rio and BHP are seeking assurances the companies are positioned to meet dividend payments after a 48 percent decline this year in iron ore, their largest earner.
A decision on approving the development of Rio’s planned Silvergrass mine in Western Australia’s ore-rich Pilbara region, which could produce about 21 million tons a year, won’t be taken before July 2015 at the earliest, the company said.
Commodity Prices
Iron ore on Nov. 25 fell below $70 a dry metric ton for the first time in five years as the biggest suppliers have added to a global glut.
The declining prices of everything from iron ore to oil are pressuring the largest commodity producers, meaning spending cuts may be required to meet pledges on returns, according to UBS AG.
An underground mine at Mongolia’s Oyu Tolgoi, an expansion that would make it the world’s third-largest copper mine, may not begin production until 2019 at the earliest, Rio said today in a presentation.
Commitments from lenders for $4.2 billion needed to help fund the development expired after a Sept. 30 deadline to reach an agreement was missed, Rio-controlled unit Turquoise Hill Resources Ltd. said last month in a statement.
“In the Oyu Tolgoi underground project, we have what is potentially the next great copper project,” Walsh told investors. “At the right time and under the right terms we will deliver a mine of exceptional value for all stakeholders.”
Rio Tinto wrote down the value of the mine by $4.7 billion in March and said it may need to take a further $800 million impairment on the project if the expansion is delayed beyond March 2015.
