By Rhiannon Hoyle
SYDNEY-- Rio Tinto PLC said it would buy back $2 billion of its
shares this year as the mining company grapples with a sharp fall
in the price of its main commodity, iron ore, and the attention of
acquisitive rival Glencore PLC.
Rio's move underscores a shift in strategy among the world's
largest mining companies, which spent years investing heavily in
new mines to meet a seemingly unstoppable rise in demand from
China. Some of those investments have now soured amid tumbling
commodity markets, leaving the mining companies facing a different
type of demand: higher shareholder returns.
Rio, which is dual-listed in the U.K. and Australia and is worth
around $100 billion, said it would purchase about $1.6 billion of
its London shares and $400 million of its Australian stock in 2015.
Its move had been widely expected after Chief Executive Sam Walsh
said last August the company would "materially increase" its
returns to investors.
Rio also said its net profit surged to $6.5 billion in 2014, up
78% from the year before when its results were knocked by
multibillion-dollar write-downs against assets such as a large
copper mine in Mongolia.
Speaking to reporters on Thursday, Mr. Walsh said Rio could
increase returns again thanks to its stronger financial position.
"That does provide the board with options going forward," he
said.
Rio, the world's second largest iron-ore exporter after Brazil's
Vale SA, was hit hard last year by a near-halving in the price of
the key steelmaking ingredient. Iron-ore prices have fallen a
further 13% so far this year, amid concerns over slowing demand
growth from China, the ore's major buyer.
Despite moderating Chinese consumption, companies like Rio, Vale
and BHP Billiton PLC continued to raise their iron-ore output last
year. Rio executives say the size of its business and the quality
of ore in its mines mean it can still produce material profitably
and at a significantly lower cost than competitors. The company
derives nearly 90% of its underlying earnings--which strip out the
effect of one-offs like write-downs--from iron ore.
But its supply-pumping strategy has downsides. Despite
increasing shipments by 18% last year, Rio's revenue from iron-ore
sales fell 10%. Rio, which also produces copper and aluminum among
other commodities, has offset some of the iron-ore price fall by
cutting costs. Even so, the company's underlying earnings fell 9%
last year to $9.3 billion.
The mining company has also slashed capital spending to ensure
it can afford its buyback program and a 12% increase in its annual
dividend. The company expects net investment to fall to less than
$7 billion this year from some $17 billion as recently as 2012. Rio
also said it cut net debt sharply to $12.5 billion from $18.1
billion a year ago.
Rio's increased shareholder returns have come after the company
received an approach from Switzerland-based Glencore last July
about a potential tie-up. Ivan Glasenberg, the chief executive of
Glencore, which mines and trades commodities, has said that
companies like Rio should curb production growth.
Mr. Glasenberg is having to rethink Glencore's own strategy amid
commodity-price falls. On Wednesday, the company said it would cut
its capital budget forecast for this year by nearly one-fifth.
Glencore's shares have fallen by 20% since Rio revealed the July
approach last October.
"The stronger Rio performs, the tougher it is to get a deal
done," said Chris LaFemina, a mining analyst at investment bank
Jefferies. "A new approach from Glencore is possible, but we would
not expect a deal to happen without a significant premium."
Mr. Walsh wouldn't comment on whether the multibillion-dollar
cash return would help keep Glencore at bay.
"[We] are not about to be distracted by what somebody may be
hollering from the grandstand," Mr. Walsh said. U.K. takeover rules
prohibit Glencore from making a new approach for Rio until April at
the earliest.
"[Rio's] ongoing capital management is a positive for
shareholders in the shorter term, therefore I suspect it would not
help Ivan's plans of getting closer to Rio anytime soon," said
George Boubouras, chief investment officer of Contango Asset
Management, which owns Rio shares.
"However the market would expect Glencore to keep trying in the
years ahead. It is in their nature," he said.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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