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The decision to buy back shares comes months after the group’s CEO Sam Walsh described the company as a “cash machine” following a cost-cutting programme. Photo: Bloomberg
The decision to buy back shares comes months after the group’s CEO Sam Walsh described the company as a “cash machine” following a cost-cutting programme. Photo: Bloomberg

Rio Tinto to buy $2 billion of shares as profit beats estimates

Buyback plan follows mining group's decision to fend off rival Glencore's merger advances

London: Rio Tinto Group, the world’s second-biggest mining company, plans to spend $2 billion in a share buyback after reporting full-year profit that beat estimates as higher output and lower costs countered a slump in commodity prices.

Underlying profit dropped 9% to $9.3 billion in the 12 months ended December, London-based Rio said on Thursday.

That compares with the $8.97 billion average of 26 analysts’ estimate compiled by Bloomberg. Estimates for the buyback before the release ranged from $1 billion to $2.5 billion according to forecasts from five analysts compiled by Bloomberg.

The decision to buy back shares comes six months after chief executive officer Sam Walsh described the company as a “cash machine" following a cost-cutting programme that helped improve profit margins. It also follows Rio’s decision to fend off the advances of smaller rival Glencore Plc, which approached it about a possible merger last year.

Rio’s profit was crimped by the 47% collapse in the price of iron ore last year as a wave of new supplies from Australia compounded a glut of the steel-making raw material. Rio’s iron ore unit is the company’s biggest earnings driver and delivered 87% of the group’s underlying profit last year.

“Our continued financial and operating discipline enabled us to offset much of the impact of lower commodity prices in 2014," the 65-year-old Walsh said in the statement. “With lower commodity prices and uncertain global economic trends, the operating environment remains tough."

Investor returns

Rio shares fell 0.7% to 2,971.5 pence on Wednesday in London trading. In November, Walsh said Rio would “materially increase" returns to investors and on Thursday it raised its dividend 12% to 215 cents a share for the year.

Net debt fell 31%, or $5.6 billion, last year to $12.5 billion at the end of last year. Declines in the oil price as well as a lower Australian dollar have helped Rio trim its mining costs. The company estimated a further cut to its costs of $750 million this year.

Spending will fall to less than $7 billion this year and remain at that level for the following two years, Rio said.

Miners will cut spending by $20 billion this year, according to Macquarie Group Ltd, as they scale back growth plans amid waning prices for metals. Producers invested $1 trillion in new mines and expansions since 2002 to take advantage of surging demand from China. At the same time as growth in the world’s second-biggest economy begins to slow, a global glut of metals is increasing, suppressing prices.

Iron ore has extended its decline this year, falling 13% amid a widening glut. Ore with 62% content at Qingdao fell 0.3% to $62.18 a dry ton on Wednesday, according to Metal Bulletin. The price fell on Monday to $61.20, the lowest on record dating back to May 2009.

Analysts have been cutting forecasts. Goldman Sachs Group Inc. and UBS Group AG both cut their estimates to $66 a ton this year, while Citigroup Inc. reduced its to $58. Bloomberg

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