Rio Tinto chief executive Jean-Sebastien Jacques has delivered a bullish assessment of the outlook for the Chinese economy for the next two years as he rewarded investors with the biggest interim dividend in the miner’s history.
Surging earnings from Rio’s iron ore division helped boost underlying earnings for the six months to June 30 by 152 per cent to $US3.9 billion ($4.9 billion).
Rio will pay an interim dividend of $US1.10, up from US45¢ for the first half of 2016. Its previous highest interim dividend was US96¢, at the height of the mining boom. Rio also launched a $US1 billion share buyback of its British shares.
Mr Jacques said four visits to China this year had given him confidence in its economic performance.
“We are pretty confident about China – clearly 2017 will be a good year for China and when we look at the metrics the early signs for 2018 and 2019 are positive,” he said.
Mr Jacques said Rio looks at data on investment in fixed assets, the property market and electricity usage to monitor the Chinese economy, and collates market intelligence from 200 staff on the ground
The strength of the Chinese economy is crucial for Rio’s largest business – iron ore – which reported an 87 per cent increase in earnings in the half to $US3.3 billion.
Chinese steel mills’ recent preference for higher grade iron ore, driven by the restructuring of the local steel sector, would continue to benefit Rio, which has top quality ore, Mr Jacques said.
But volatility in pricing is likely to persist across the board, he said.
“Beyond China global economic conditions have improved in both Europe and in the US,” Mr Jacques said.
“So the outlook is stable, but price volatility will remain a feature of the market.”
The iron ore price is trading at about $US73 per tonne, after gyrating from over $US90 per tonne in February to about $US53 in June.
Mr Jacques said Chinese port inventories and production volumes would remain the key drivers of iron ore price volatility, with Chinese production expected to creep higher in 2017 after significant production cuts in recent years.
“It is a typical supply demand balance situation – depending on the balance the price fluctuates and I think what we have experienced this year is a very good example of it,” he said.
Rio’s dividend was below market consensus of $US1.18 a share, and underlying earnings were also just under consensus of $US4.15 billion; it posted underlying earnings in the previous corresponding period of $US1.56 billion. Chief financial officer Chris Lynch said Wednesday’s result was below consensus due to costs associated with a strike at the Escondida copper mine that Rio part owns and a deferred tax liability.
Rio shares fell 1.7 per cent in early trade in London, but have surged 47per cent in the last 12 months. .
The bumper payout sets the scene for any even bigger windfall in February 2018, when Rio will pay its final dividend.
The miner skews its shareholder payouts to the second half of its financial year, and its coffers will soon be swelled when it receives $US2.45 billion from the sale of its Coal & Allied thermal coal business to Chinese backed miner Yancoal.
Those proceeds are expected to arrive in the September quarter and with Rio’s balance sheet in strong shape – net debt was $US7.6 billion at June 30, down from $US9.6 billion at the same time last year – there appears little need for further balance sheet repair.
Shaw and Partners analyst Peter O’Connor said that while the result was just below market expectations, investors would be pleased by the increased dividend and the buyback.
He said Rio had scope to increase dividends further.
“The balance sheet is in great shape, tracking at gearing of just 13 per cent, well shy of the 20 per cent lower guidance range – suggesting that there is some flexibility in regards further capital management upscaling for the end of the 2017 year.”
The sentiment was echoed by Citi analyst Clark Wilkins and Barclays’ Amos Fletcher. “These results highlight our view that Rio offers very clean transfer of cash generation back to shareholders,” Mr Fletcher said.
Mr Jacques said the $US3 billion in shareholder returns showed the company’s focus on free cashflow was delivering for investors. The Anglo Australian miner hit its target to cut $US2 billion worth of costs over the 2016 and 2017 years six months earlier than expected and remains on track to deliver $US5 billion in extra free cashflow by 2021.
“The shareholder returns reflect the good work on the balance sheet, but it reflects the good work we are doing with the performance of the business,” he said on Wednesday.
“We will not be shy in giving health superior returns for our shareholders and today is a good example of that.”
Earnings from Rio’s copper division rose 16 per cent to $US771 million, and the company remains confident in the outlook for commodity given an expected supply shortfall over the medium term.
“When you look at the pipeline of projects for the next 10 years there is simply not enough projects advanced enough to meet demand and therefore we are pretty bullish about copper,” Mr Jacques said.
There were also good results from Rio’s coal division, where underlying earnings rose 170 per cent to $US1.4 billion, while its aluminium division also posted strong gains, with earnings rising 55 per cent to $1.7 billion.
Net profit was up 93 per cent to $US3.3 billion.
Rio’s Australian shares closed at $65.84 in Sydney on Wednesday prior to the release of the result.
By James Thomson and Tess Ingram