Rio Tinto has warned of lower prices for miners as a result of slowing Chinese growth as it unveiled a $2bn share buyback to meet pledges to raise returns for investors.
The Anglo-Australian miner’s underlying annual earnings fell 10 per cent to $9.3bn after an 18 per cent slide in earnings from iron ore, by far Rio’s most important commodity.
Amid gloom over many commodities markets, Rio said the sector faced further problems in 2015 and continuing pressure on margins.
Chinese growth drove demand for most commodities over the past decade during what was sometimes dubbed a “supercycle” for the resources sector. Now mining was adjusting to a new phase of economic development in China that was “likely to result in lower price levels compared with those seen during China’s years of capital intensive growth”, Rio said on Thursday.
However, the miner added that margins for low-cost producers should remain higher than the average levels of a decade ago.
Rio has been under pressure to raise returns, with investors unhappy that too great a proportion of profits was recycled into expansion during the commodities boom.
The buyback is also seen as a way to reassure investors, after the miner rebuffed an informal approach last year from Glencore, its rival commodities group.
Sam Walsh, Rio’s chief executive, said: “Last year, we made a clear commitment to materially increase cash returns to our shareholders . . . Decisive early action throughout the group delivered the strong balance sheet, which enables us to announce today’s additional material cash return.”
Rio flagged the buyback last year after it said it was happy with its debt levels. By year-end net debt had been cut from $18.1bn to $12.5bn. Capital spending was reduced by 37 per cent to $8.2bn and cash flows were helped by a $1.5bn release of working capital.
Miners have been slashing capital projects as the commodities cycle has turned and shareholders have rebelled against more spending. Mr Walsh said capital expenditure — which peaked at more than $17bn in 2012 — would be less than $7bn this year and about $7bn in the next two years.
Annual revenue fell from $51.2bn to $47.7bn. Rio’s net income rose from $3.7bn to $6.5bn, helped by lower impairment charges.
Rio did not book a further charge at its Oyu Tolgoi copper project in Mongolia, where the miner and the government are struggling to reach agreement on the next phase of the project.
The strategy of Rio and other iron ore miners to push up production while driving down unit costs has been criticised by Ivan Glasenberg, Glencore’s chief executive, who has argued that miners must show more supply discipline.
The benchmark price of the steelmaking commodity halved during 2014.
Rio argues that its iron ore business is still hugely profitable even at significantly lower prices, and that it would be foolish to cede market share to higher-cost producers.
However, it acknowledged that the fall in oil prices and in some commodity currencies including the Australian dollar could delay the moment when unprofitable producers were forced from the market.
Rio raised its full-year dividend 12 per cent to 215 cents per share, a lower rate of increase than the 15 per cent hikes in each of the past two years.
The miner’s much-criticised aluminium business performed better. With aluminium a relative bright spot among commodities last year, underlying earnings from aluminium more than doubled to $1.2bn — more than Rio earned from its copper business.
James Wilson, Mining Correspondent