February 9, 2012 / 6:53 AM / 7 years ago

Rio Tinto dividend surprise masks aluminum hit

MELBOURNE (Reuters) - Global miner Rio Tinto (RIO.AX) hiked its dividend by a third and said it was confident about its long-term outlook despite reporting a drop in second-half profits and taking a $9 billion charge on its struggling aluminum business.

Like rival BHP Billiton (BHP.AX), which reported a similar 6 percent fall in first-half earnings on Wednesday, Rio was cautiously optimistic that a soft landing in China would drive growth this year.

Analysts said Rio’s 145 cent dividend showed Rio remained upbeat in the face of volatility in commodity prices.

“The dividend has surprised on the upside,” said Mark Taylor, senior resources analyst at Morningstar. “That’s information about their confidence on their outlook.”

The world’s No.2 iron ore miner flagged an increase in investment and said it was in a stronger position than most in the industry to drive growth, a shot across the bow at the proposed $90 billion merger of Glencore (GLEN.L) and Xstrata XTA.L.

“I believe that we have the highest value growth program in the industry and our iron ore expansions in the Pilabara are second to none,” chief executive Tom Albanese said in a statement.

Underlying earnings before one-offs fell to $7.77 billion for July-December from $8.22 billion a year earlier, with booming iron ore sales making up the lion’s share of the profits. Analysts on average had expected a second-half profit of $7.5 billion before one-offs.

However, Rio warned that rising costs had squeezed profits, especially on the labor front, just as workers at rival BHP Billiton’s (BHP.AX) Bowen Basin coal mines voted to go on strike for one week.

“Throughout Australia we’ve been impacted by rising costs and what I’m concerned about is declining productivity,” Albanese told reporters.

Rio’s London-listed shares fell 1.8 percent in early trade.


Graphic on earnings: link.reuters.com/qyh56s



Rio booked a larger-than-expected $8.9 billion writedown on its aluminum business, having bought Alcan for $38 billion at the height of the boom in 2007. That dragged Rio into the red for the second-half and prompted Albanese and Chief Financial Officer Guy Elliott to forego their bonuses.

“As the acquisition of Alcan happened on my watch, I felt it only right not to be considered for an annual bonus this year,” Albanese said.

One-off charges including a writedown on its diamonds business totaled $9.3 billion.

The aluminum division, which the company plans to shrink by hiving off most of its Australia and New Zealand assets, just broke even with earnings of $63 million in the December half.

Rio, cashed up from massive iron ore sales and carrying little debt, had been considered the most likely among the major miners to reward investors with a share buyback or a substantial dividend increase.

It came through on Thursday, boosting its full year dividend by 34 percent to 145 cents. However, it did not expand its $7 billion buyback due to be completed this quarter.

“While I would have liked to have seen some capital management, the higher dividend will be appreciated,” said Tim Barker, portfolio manager at BT Investment Management, which owns BHP shares.

While stepping up its dividend, Rio Tinto also flagged higher spending on projects for 2012, budgeted at $16 billion, up from $12.3 billion last year, with more spending on iron ore expansions likely to increase that even further.

Second-half profit from iron ore, its biggest earner, jumped 14 percent to $6.9 billion.

“The increase in the dividend and the increase in the capital are both expressions of confidence that we’ve got in the future,” Chief Financial Officer Guy Elliott told reporters.

Investors say the company should still have enough cash to chase acquisitions, with Canada’s Ivanhoe Mines (IVN.TO), owner of the huge Oyu Tolgoi copper and gold mine operated by Rio Tinto, in its sights.

“I think Rio has within its wherewithal enough firepower to conduct capital management at the same time as doing sensible M&A,” James Bruce, a portfolio manager at Perpetual, which owns shares in Rio Tinto, said ahead of Rio’s results.

Editing by Lincoln Feast

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