(source: The Wall Street Journal)
Rio Tinto PLC is facing a problem that few would have anticipated a year ago: what to do with all its cash.
After an increase in prices of everything from iron ore to copper, the world’s No. 2 mining company, and its rivals, are enjoying an unexpected recovery and analysts expect that they could take advantage of the market rebound to reward loyal investors.
Market investors are anticipating a bounce in returns broadly from the mining sector, and share prices have surged higher as a result. The S&P/TSX Global Mining Index, a gauge of miners’ performance, is up 70% over the past year.
Swiss miner and trader Glencore PLC already said in December it plans to reinstate payouts to investors in 2017 after selling assets and paying down debt. Investors and analysts hope other miners such as Rio Tinto may be considering a special dividend or even a share buyback to reward investors, although that may not happen until later in the year once executives are comfortable with the market’s recovery.
For Rio Tinto, the windfall should allow Chief Executive Jean-Sébastien Jacques, seven months into the job, to better stamp his strategy on the mining giant. Investors will be watching closely to see how the miner balances paying down debts, handing out dividends and reserving cash for a rainy day when it releases its annual earnings on Wednesday.
“The focus on shareholder value is sharper than ever before,” said Nicki Ivory, Deloitte’s Australian mining leader.
The Anglo-Australian giant is expected to post an annual profit of US$5.18 billion for 2016, versus a net loss of US$866 million in the year prior, according to the median of eight analyst forecasts. RBC Capital Markets estimates Rio Tinto added US$1.1 billion in cash to its balance sheet in 2016. In addition to better prices, a continuing campaign to improve productivity is bearing fruit.
Rio Tinto is projecting that over the next five years it can generate US$5 billion in additional free cash flow—a measure of cash generated from operations minus investments—just from the push to improve its mines.
RBC is among those forecasting spare cash from 2016 will be directed toward dividends and debt. It is projecting a US$1.53 dividend, above Rio Tinto’s target of at least US$1.10. Canaccord Genuity has a US$1.30 estimate for 2016 and a US$1.88 forecast for 2017.
Debt reduction will certainly remain a focus for Rio Tinto and its peers, many of whom were scrambling to shore up their balance sheets when the China-led commodities boom collapsed.
Net debt for the world’s top six diversified miners dropped to US$89 billion in 2016 from US$110 billion the year prior, and is likely to be cut to roughly US$70 billion by the end of 2017, Credit Suisse predicts.
Mining executives are continuing to operate as though markets are weak, investors say. Few expect companies to resume their free-spending ways that characterized the industry’s boom years.
Miners also won’t want to overextend themselves as they begin to turn their attention to growth. Rio Tinto is already advancing iron-ore and bauxite developments in Australia and a copper mine in Mongolia.
“It is a balancing act,” said Deloitte’s Ms. Ivory.
Nevertheless, miners have come a long way from the dark early days of 2016, when prices were approaching what some executives had earlier described as doomsday scenarios.
And, this has struck a hopeful note among analysts: “2016 was a year of demand recovery and balance sheet repair, and 2017 should be a year when miners begin to repay investors for five tough years of under performance through higher cash returns and ongoing capital discipline,” Credit Suisse said.