Rio Tinto pays out record dividend, profit hits three-year high

By Melanie Burton and Barbara Lewis

MELBOURNE/CAPE TOWN (Reuters) - Rio Tinto handed out a record dividend on Wednesday and predicted global manufacturing growth would drive further returns after stronger commodity prices helped the miner to its highest annual profit in three years.

All the big miners have recovered from the commodity crash of 2015-16, but Rio Tinto has emerged with the strongest balance sheet and a pile of cash, raising the question of what it can do to grow when the most obvious resources have been mined.

Its full-year dividend of $2.90 a share - equal to about $5.2 billion - was up 70 percent from last year and reflected higher prices for iron ore, aluminium, copper and coking coal.

Rio, which also announced an additional $1 billion share buyback, reported a 69 percent jump in underlying earnings for calendar 2017 to $8.63 billion, roughly in line with analyst estimates of $8.74 billion compiled by Thomson Reuters I/B/E/S.

"All in all, we believe that we'll be able to generate a lot of cash this year," Chief Executive Jean-Sebastien Jacques told reporters on an earnings call.

"The strength of our balance sheet means we are ideally placed to deal with any economic volatility, invest in high value growth and retain the optionality for smart M&A."

Rio, which more than halved its net debt to $3.8 billion, said higher commodity prices helped drive full-year revenues up 18.3 percent to $40 billion.

The record dividend follows Rio's decision to abandon its progressive dividend policy in 2016 when markets were much weaker and other companies scrapped dividends altogether.

Under the new policy, the company pays out between 40 and 60 percent of underlying earnings throughout the cycle.

Chris Lynch, CFO, said in a telephone interview that Rio had for a second year paid out at the high end of the range and the new policy was "a great shareholder return story".

SOLID RESULT, CHINESE MARKET SHARE GROWS

Analysts agreed the results were strong, although the share price was barely moved in London trade and slightly down since the start of the year on a broader market sell-off.

Portfolio manager Andy Forster at Argo Investments in Sydney said it was a solid result.

"Dividends that are bigger than the market expected, and it increased the buy back, an incremental $1 billion, that's pretty positive," he said. "The quality of their product has attracted a premium and they have done well on costs, though that is probably starting to get more challenging going forward."

Chinese demand, especially for the high-quality iron ore Rio Tinto can deliver and which is less polluting, has been a spur.

Rio Tinto has grabbed more market share in China as the country's steelmakers respond to a crackdown on pollution.

Iron ore, Rio's biggest income generator, contributed $6.69 billion in full-year underlying earnings, nearly 70 percent of the total. Average prices for the steel-making ingredient rose 20 percent last year from 2016, the miner said.

Australia's government has forecast a 20 percent fall in average iron prices this year on rising supply and moderating Chinese demand, but that is out of step with private forecasts, such as UBS and Citi, which see smaller reductions.

Rio maintained its 2018 capital expenditure forecast at around $5.5 billion, while keeping its 2018 production guidance intact after raising its iron ore shipments target by 10 million tonnes last month.

Its growth projects include the giant Oyu Tolgoi copper mine in Mongolia.

It has also said Africa is the largest untapped source of growth and on the sidelines of the Indaba mining conference in Cape Town said its board would this year consider a potential $450 million investment in expanding infrastructure near the Richards Bay terminal, South Africa.

Jacques acknowledged market volatility and short-term risk in China, but said the miner was confident in the world's top commodities consumer and said global manufacturing was growing.

"China is the main customer in relation to the mining business (but) the GDP is pretty strong across all geographies today. Mining at the end of the day is a GDP-driven industry so today we are in a good space," he said.

(additional reporting by Rushil Dutta in Bengaluru; editing by Richard Pullin and Louise Heavens)