London - Rio Tinto Group insists tumbling iron ore prices won’t halt the lowest-cost producer’s plans to give money back to shareholders.
“We shouldn’t panic when there’s a blip in iron ore prices,” Rio Chief Executive Officer Sam Walsh told reporters today in Sydney. He dismissed suggestions the company wouldn’t boost returns to investors when reporting profit in February, saying “we are committed to making a material increase”.
In August, Rio raised its dividend and flagged further returns, saying it’s on its way to becoming a “cash machine” as its cost-cutting drive starts to bear fruit.
His view is backed by JPMorgan Chase & Company, which said last month that iron ore’s slump to five-year lows wasn’t expected to prevent Rio and BHP Billiton Ltd from returning cash to investors.
The industry’s focus on cost-cutting and share buyback programs suggests the sector may have reached the bottom of the cycle, BlackRock’s Evy Hambro, who manages the $7 billion World Mining Fund, said today on Bloomberg TV’s On The Move.
“The fact that management are now going down this path and looking to reward investors with increased returns - and we’ve seen the first buybacks in the industry - gives us grounds for a significant amount of optimism,” Hambro said.
BlackRock is among major mining investors that have campaigned for shareholders to get priority after a decade-long, $618 billion investment spree that prompted asset writedowns and flooded metals markets.
GLENCORE APPROACH
Rio, which said last week it had rejected a merger approach from Glencore, rose 0.4 percent to A$60.99 in Sydney trading, trimming its decline this year to 11 percent. The wider market gained 0.7 percent.
London-based Rio rebuffed an approach in July from Glencore Chief Executive Officer Ivan Glasenberg that would have created a producer with leading positions in coal, iron ore and copper worth $160 billion, usurping BHP as the industry’s leader.
“I can well understand why there’s interest because we’re a pretty good business,” Walsh said today.
Glencore is no longer actively studying an offer for Rio, the Baar, Switzerland-based company said last week. Under UK takeover rules, the producer and trader is barred from a renewed attempt for six months unless it obtains the Rio board’s recommendation, a third party makes an offer for the company, or there are other material changes.
PRICE PLUNGE
Iron ore prices have plunged to five-year lows on the back of expansions by Rio, Vale SA and BHP, adding to a global glut. Production increases by the big three may push the global surplus to 163 million tons in 2015 from 52 million tons this year, according to Goldman Sachs Group.
Rio, the second-biggest iron ore producer, forecasts shipments of 300 million tons this year, including output attributable to its project partners, it said today in a statement. Rio de Janeiro-based Vale, the biggest exporter, forecasts output in 2014 of 312 million tons, it said last month.
“The fundamentals are still very strong in the industry,” Walsh said. Industrialisation across South East Asia, the Middle East, South America and Africa will underpin demand for commodities as growth cools in China, he said.
A cost-cutting drive by Rio has stripped out $3.2 billion of expenses since 2012 and is targeting a further $1 billion in savings by the end of next year, Walsh said in August.
Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director of Glencore.
Bloomberg