(FROM THE WALL STREET JOURNAL 2/12/16)
By Rhiannon Hoyle
SYDNEY -- Rio Tinto on Thursday lowered its dividend and slumped to an annual loss, effectively conceding it had misread the strength of China's commodities demand, signaling a new era of diminished returns for mining investors.
Rio Tinto said it could no longer justify its commitment to maintaining or steadily increasing its dividend each year when the global economic outlook is worsening and the prices for many commodities that the company produces, such as iron ore and coal, are at multiyear lows.
"Future dividend outcomes will really rely on the market conditions," Chief Executive Sam Walsh said.
"We don't run our business on hope," he said.
The dividend cut marks a decisive blow to the notion that commodities companies were safe investments even during a prolonged market slump. Rio Tinto and other mining companies ramped up investor payouts for years to remain attractive to big investors such as pension funds.
Its chief rival, BHP Billiton, the world's most valuable mining company, is expected to abandon its progressive dividend at or before its earnings announcement on Feb. 23. Swiss mining and trading company Glencore PLC and the U.K.'s Anglo American PLC have already slashed theirs to hoard cash during the current downturn.
But Rio Tinto had been seen as a relatively strong performer compared with such rivals, and its move highlights the substantial measures mining companies are taking to bring their expenses in line with their revenues.
"This signals a dramatic change in both the outlook for the company and the industry," Citigroup said in a note about Rio Tinto's results. "It does, however, align the dividend policy to cash flow of the business."
Rio Tinto said this year's annual dividend could be roughly half the US$2.15-a-share payout declared for 2015, a blow for investors who supported years of heavy investment in new mines, especially in Australia's remote Pilbara region.
In the run-up to Thursday's result, most brokers had argued that Rio Tinto wouldn't need to pare this year's payout. Some said it was the wrong move.
"I would have liked to see them hang on for longer," possibly two or three more years, said Nik Stanojevic, an equity analyst at Brewin Dolphin Ltd., a $44 billion private-wealth manager.
Mr. Walsh said changing gears was "prudent."
"I don't think anybody predicted what is happening in the world economy today," he said.
Rio Tinto also reported a net loss of $866 million for 2015 on Thursday, compared with a profit of $6.53 billion a year earlier. The result was weighed down by impairment charges totaling $1.8 billion against the company's Simandou iron-ore project in Guinea and uranium assets in Australia and Canada, as well as $3.3 billion in foreign-exchange and derivatives losses.
Underlying earnings, a measure tracked by analysts that strips out some one-time costs, fell 51% to $4.54 billion.
Behind Rio Tinto's troubles lies the slowdown in growth in China, especially in its manufacturing and construction industries. China buys three in every five tons of iron ore traded by sea to make steel, and relies on Australia for most of its imports.
Rio Tinto has spent billions of dollars expanding its mines and output in recent years. But the company could earn less from its key iron-ore business this year than it did in 2006, Citi now forecasts.