Rio Tinto payout hopes brighten on solid outlook for 2017

By James Regan

SYDNEY (Reuters) - Global miner Rio Tinto could be in a position to reward shareholders with a strong dividend hike or even a share buyback next year as it benefits from a sharp rise in metals prices, fund managers and analysts said on Tuesday.

Rio Tinto's decision last year to pursue "value over volume" at its mines to ensure maximum shareholder returns has put the world's second biggest mining company at the forefront of the commodities price revival.

It reported output and shipments for 2016 in line with its guidance on Tuesday and kept its targets for 2017 intact, expecting to ship 330 million-340 million tonnes of iron ore.

"Our disciplined approach remains in place in 2017, with the continued focus on productivity, cost reduction and commercial excellence," Rio Tinto Chief Executive Jean-Sebastien Jacques said in releasing the company's full-year operations report.

Two fund managers said Rio Tinto's 2016 performance and outlook for 2017 could prompt the board to consider boosting shareholders' returns, including buybacks.

"Depending on what commodity prices are like through the end of the year and what options they have in terms of reinvestment, we may see some form of capital return," said Arnhem Investment Management portfolio manager Neil Boyd-Clark.

Iron ore prices last year defied forecasts, rising sharply as Chinese steel production was stronger than expected, but most forecasters doubt prices will remain high over 2017.

Iron ore, Rio Tinto's biggest earner, is selling for more than $83 a tonne, up 6 percent in the past two weeks following an 81 percent gain over 2016.

That's more than double the record low price of $38.30 a tonne in December 2015, which led the company to dump its policy of never cutting dividends after suffering an $866 million loss for 2015.

For 2016, Rio Tinto is forecast to report net profit of $4.6 billion, according to Thomson Reuters I/B/E/S, and has committed to pay out at least $1.10 per share. Analysts tip Rio will pay a dividend of $1.34 for 2016, rising to $1.76 for 2017.

Prices of copper and aluminium, two other key drivers, rose 25 percent and 12 percent respectively in 2016 and continue to climb this year.

Shaw & Partners analyst Peter O'Connor believes Rio Tinto could generate as much as $6 billion in free cash this year and again in 2018, setting the stage for higher returns to investors.

"Couple that with gearing at the low end of the guidance range, we expect that some pretty chunky capital management is on the agenda, i.e. dividend payout to head towards the higher end of the 40-60 percent band and a share buyback or two," he said in a note.

(Reporting by James Regan; Editing by Sonali Paul)