Rio Sees ‘Fuel Left’ in China’s Growth After Iron Ore Windfall

(Bloomberg) -- Rio Tinto Group sees prospects for a controlled slowdown in China, the top commodities consumer, as the No. 2 miner shared an earnings windfall from iron ore’s price surge to extend a run of bumper returns to investors.

“China is slowing down, but it is totally controlled and they have lots of ways to maintain it,” Chief Executive Officer Jean-Sebastien Jacques told reporters Thursday on a conference call. A June meeting in China with Premier Li Keqiang and other business leaders had offered reassurance on the outlook and “gives me confidence there is lots of fuel in the tank,” he said.

First-half underlying earnings rose 12 % on a year earlier to $4.93 billion, fueled by the spike in iron ore, its top-earning commodity. Prices last month touched a five-year-high on buoyant demand in China and amid supply shortages prompted by Vale SA’s fatal waste dam spill in Brazil and a cyclone that battered Australian ports.

London-based Rio announced a $1 billion special dividend, part of a total package of $3.5 billion in returns to shareholders. That compared to returns a year ago of $7.2 billion, which included $4 billion in one-off proceeds from assets sales. Rival Anglo American Plc said last week it will buy back $1 billion of shares after booking strong iron ore profits, while other top miners including BHP Group are also forecast to post strong earnings later this month.

A $800 million writedown on Oyu Tolgoi copper asset in Mongolia is a fresh blow to Rio’s most important growth project. The underground expansion of the mine -- to access the bulk of the site’s mineral riches -- could cost as much as an additional $1.9 billion, with delays potentially extending to 30 months amid difficult ground conditions at the site.

Rio declined 3% as of 8:50 a.m. in London trading, as rival BHP Group fell 1.7%.

After a deluge of returns since Jacques took his post in mid-2016, some investors are questioning whether Rio is striking the right balance between returns and reinvestment, JPMorgan Chase & Co. said in a note this week. Rio boosted exploration spending by almost a quarter in the first half, and is advancing copper developments in the U.S. to Australia, the producer said in a statement.

“We are always working on trying to have the best possible growth pipeline, but we don’t feel any investor pressure,” Chief Financial Officer Jakob Stausholm said in a phone interview. “It’s not just a choice between dividends and investments -- we have a very strong balance sheet, we actually have some optionality.”

To contact the reporters on this story: David Stringer in Melbourne at dstringer3@bloomberg.net;Rebecca Keenan in Perth at rkeenan5@bloomberg.net

To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net, Keith Gosman, Jake Lloyd-Smith

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