By Rhiannon Hoyle 

SYDNEY-- Rio Tinto PLC said it would buy back shares worth US$500 million and pay a higher-than-expected dividend after returning to profit in 2016, moves that sent its shares higher amid deepening confidence that the global mining industry has turned a corner.

The Anglo-Australian miner is emerging from a deep downturn in the resources sector in better shape than many of its peers owing to an unexpected sharp recovery in commodity prices last year and an aggressive campaign to cut costs and boost efficiency at pits from the U.S. to the Australian Outback.

An annual profit of US$4.62 billion marks a turnaround in fortunes for a company that made a US$866 million loss a year ago and was forced to junk a prized progressive dividend policy, which promised stable or rising returns, to conserve cash.

On Wednesday, Rio Tinto said it would pay an annual dividend of US$1.70 a share after a recovery in prices of its key products including iron ore, copper and coal left it with a large cash surplus. That was well above the US$1.395-a-share forecast by analysts polled by The Wall Street Journal and Rio Tinto's stated commitment to pay a minimum US$1.10 a share dividend.

Rio Tinto's plan to buy back a chunk of its London-listed stock was a further surprise as analysts had expected the miner to wait until later in the year, at least. The company's shares rose 3% after the result, which included a 12% rise in underlying earnings to US$5.10 billion.

"We wanted to make sure we sent a strong signal to our shareholders that we meant what we said," Chief Financial Officer Chris Lynch said. When Rio last year scrapped its progressive dividend policy, it laid out intentions to boost returns in times of strong earnings and cash generation.

Still, the dividend was the miner's weakest since 2012, and down on last year's US$2.15-a-share.

Rio Tinto, which was a takeover target for Swiss commodities trader Glencore PLC as recently as 2014, has been reducing its focus to a smaller group of assets that it can run more profitably. The company recently agreed to sell Coal & Allied Industries Ltd., which accounts for more than half of its coal production, to China-backed Yancoal Australia Ltd. for up to US$2.45 billion. It also sold off a Scottish aluminum smelter and this week agreed to gift its halted Bunder diamond project in India to the government of Madhya Pradesh state.

That strategy, which helped to reduce annual operating costs by US$1.6 billion last year, has strengthened its cash flow and enabled management to repay debt as well as bolster shareholder returns. Mr. Lynch said he's eager to pay down more debt, even after a 30% reduction in net debt in 2016 to less than US$10 billion.

"I want to get the strength fully cemented into the balance sheet," he said.

Rio Tinto said it also has flexibility to invest in new projects even if commodity prices soften, although the company's track record in doing deals is patchy with the value of many assets later written down. The miner currently faces separate regulatory probes over African iron ore and coal deposits acquired several years earlier, which could hurt it materially in future.

Mr. Lynch said there was no way to quantify the potential future cost of the investigations and any possible litigation, with a board committee established to keep those regulatory issues under review.

The price of iron ore, which accounts for most of Rio Tinto's earnings, roughly doubled last year from a more-than decade low because of robust demand from China's steel industry and slowing growth in global mine output. Prices of other commodities including coal and copper also rose.

"This time last year was dead set one of the worst mining reporting seasons I can remember," said Evan Lucas, a Melbourne-based analyst at broker IG. "I don't think, even in their wildest dreams, the miners foresaw the turnaround that has since occurred."

The S&P/TSX Global Mining Index, a gauge of miners' performance, is up 60% over the past year, with investors tipping a recovery in returns more broadly. Glencore, which scrapped dividends amid the downturn, said in December that it plans to reinstate investor payouts in 2017.

"Am I concerned today about China? The answer would be no," said Chief Executive Jean-Sébastien Jacques, who took over from Sam Walsh in July . He said the construction market is holding up well and that he expects more stimulus from Beijing to support economic growth. China is the world's biggest buyer of commodities such as iron ore and copper.

Mr. Jacques said it is too early to judge the impact of new President Donald Trump on the U.S. economy, but "clearly there are some positive signals in relation to infrastructure and company tax."

Still, the miner is cautious about the outlook for Europe. "The strong balance sheet is the greatest preparation we can have for any volatility that could be there in markets," Mr. Lynch said.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

 

(END) Dow Jones Newswires

February 08, 2017 05:01 ET (10:01 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
Rio Tinto (NYSE:RIO)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Rio Tinto Charts.
Rio Tinto (NYSE:RIO)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Rio Tinto Charts.