The firm’s key iron ore division, saw production grow 4% in the final quarter which pushed output for the full year to 329.5 million tonnes, 6% higher than 2015. Both bauxite and aluminium production were better than analysts expected, with copper the sour note.
While mined copper production came in at 523 thousand tonnes, 4% higher than 2015, this was below full year guidance as a result of lower-than-expected production at its Kennecott mine and ongoing productivity issues at its Grasberg operation.
Rio Tinto CEO, J-S Jacques said the performance was underpinned by the firm’s “drive for efficiency and maximising cash flow” before reiterating its guidance for 2017.
“Our disciplined approach remains in place in 2017, with the continued focus on productivity, cost reduction and commercial excellence. This will ensure that we continue to deliver value for our shareholders.”
RBC Capital Markets said it continues to see upside for the diversified miner in spite of the 34% increase in its share price over the past three months.
Part of the reason for this is the growing expectation that the impact of strong commodity prices could filter through to dividends as the firm’s gearing ratio falls below the bottom end of its target range of 20-30% over the cycle.
RBC said: “Although we see a small potential for a special dividend to be emerging at the 2017 results (gearing will be at or below the low end of target range) the regular dividend (calculated at 60% of the EPS) would provide a dividend of $1.56 vs. consensus of $1.29 which should provide for more momentum heading into the results.”
Stephen Bailey, co-manager of the Liontrust Macro Equity Income Fund is also positive on the stock, which he said plays well into the firm’s infrastructure spending theme and is also bullish on the dividend.
“We are fairly expectant of a very healthy dividend hike,” he said, adding that, as far as he is concerned, it ticks a lot of boxes: “First, it is the most secure from a financial stand point, it is not exposed to some of the more geographically risky parts of the mining world and, it does not have the oil diversification that BHP Billiton has.”
Joanne Rands, co-manager of the Rathbone Recovery Fund, which holds a stake in both Rio Tinto and BHP Billiton is also cognisant of the growing chatter about increased dividends.
“Rio is a very low cost producer and we like its focus on the value of production rather than straight volume,” she said. But, she warned, while there is a prospect of higher dividends, the sector remains very macro-driven and, should global growth expectations turn out to be lower than expected, there remains the risk that prices fall.
The firm changed its dividend policy at the beginning of 2016 from a progressive policy to one that attempts to strike a balance between cash returns and investment and targets total cash returns to shareholders of 40%-60% of underlying earnings through the cycle.
