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Rio Tinto takes swipe at Glencore and promises shareholder returns like dividends and possible buybacks

Rio Tinto insists it can “materially” increase shareholder returns in the new year despite sliding commodity prices, and has indicated it is not afraid of striking a coal deal with Glencore at the right price.

Rio chief executive Sam Walsh assured investors on Friday that he could keep his promise of returning cash to shareholders by slashing capital spending, reducing debt payments and continuing to lower costs.

Expected funding commitments for new mines in the iron ore, bauxite and coal divisions were overlooked on Friday and, after promising to spend around $US11 billion on projects at the start of the year, Rio is on track to spend just $US8.5 billion in 2014.

“Over the next five years we expect to generate strong free cash flow and we remain committed to materially increasing cash returns to shareholders in a sustainable way,” said Mr Walsh.

“I truly look forward to announcing this at our annual results in February next year.”

But with revenue sliding due to low commodity prices, Rio may need to use debt to fund its shareholder returns in February.

JP Morgan analyst Lyndon Fagan speculated on Thursday that Rio might not be able to fund its payout promise from cash generation alone.

“At spot prices, we estimate a small gap between free cash flow and dividend commitments,” he said, assuming Rio’s payout program was worth between $US200 million and $US700 million.

When asked on Friday if Rio would generate enough cash to cover the imminent round of shareholder returns, chief financial officer Chris Lynch said; “We do have both generated (cash) and balance-sheet capacity”.

Deutsche analyst Paul Young said Rio’s cash generation would accelerate in the second half of 2015, and the miner could cover the shareholder payout without using debt if it got the timing right.

“They could announce a buyback mechanism which allows treasury to buy back stock when free cash flow is available, which means the buyback will probably be weighted toward the second half of next year,” he said.

In the wake of Glencore’s unsuccessful bid to merge its Australian coal operations with Rio’s earlier this year, Rio used the briefing to showcase the quality of its Hunter Valley thermal coal business.

Energy boss Harry Kenyon-Slaney said every Rio coal mine in Australia was currently profitable, despite coking coal prices sliding by 16 per cent over the past year and thermal coal prices falling 25 per cent over the past year.

“We do have the best coal assets in the Hunter Valley,” he said, adding that Rio had up to 100 years of coal at its disposal in the region.

Under a new coal strategy called “Hunter Blend”, Rio will try to improve co-ordination between its various Hunter Valley mines rather than treating them like individual operations.

The move is expected to help boost exports while cutting costs.

Mr Walsh said Rio was not opposed to transactions with other companies in principle, and he pointed to the sale of the Clermont coal mine to Glencore and Sumitomo in 2013 as evidence.

“We have a total open mind if there is somebody out there that is going to offer us a price that offers more value than we see in an asset. But this is not market day at the bazaar,” he said.

In a veiled swipe at Glencore, which also approached Rio about a full merger in July, Mr Walsh said some offers were not worth consideration.

“There are other transactions, and there is a range of them, that didn’t pass muster; they didn’t make sense. There may be synergies and that is terrific, but if you lose your shirt going into a transaction like that, then it doesn’t matter what the synergies are,” he said.

Most analysts believe Rio’s Australian coal assets are better than Glencore’s, with one suggesting Glencore would need to pay an equalisation fee if a coal merger went ahead.

Rio will continue boosting  iron exports on the same schedule that attracted criticism this year, but will do so in a less expensive way.

Rather than commit more than $US1 billion on building a new iron mine at Silvergrass in the Pilbara, Rio has vowed to defer that spending by at least one year, and achieve its targets using extensions to existing mines.

Rio has vowed to export 350 million tonnes from its Pilbara business by 2017, and will need to develop Silvergrass to reach 360 before 2020.

The iron ore price was fetching $US69.98 on Friday, having fallen from above $US140 per tonne in the past 12 months.

This story Administrator ready to work first appeared on Nanjing Night Net.

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