Rio Tinto chief executive Sam Walsh.

Rio to cut dividends, capex after loss

Thursday, 11 February, 2016 - 14:32

Mining giant Rio Tinto has reported an $US866 million ($A1.2 billion) annual loss, and has responded by cutting its future dividends, operating costs and capital spending, though the long-planned Silvergrass mine in the Pilbara is shaping up as one of the company's few big projects to proceed.A collapse in commodity prices contributed to Rio's plunge into the red in 2015, from the previous year's $US6.5 billion profit.

Chief executive Sam Walsh said 2016 is shaping as an even tougher year, amid continuing volatility and uncertainty on global markets.

"Certainly the game has changed," he said.

"We've seen a rapid decline in commodity prices and we're taking proactive action.

"We're taking leadership in relation to responding to this and it's not just a matter of looking at dividends, it's looking at every single aspect of the business."

Rio will end its current progressive dividend policy in favour of a more flexible approach to reflect the company's performance.

It will pay dividends of $US2.15 per share for 2015, and said it intends for 2016 full year dividends to fall to no less than $US1.10.

A new $US2 billion cost cutting program has also been launched for 2016 and 2017, while capital expenditure will be reduced by a further $US3 billion than already planned over the next two years.

Rio's shares in London fell seven per cent in early trade as investors digested the bad news.

Mr Walsh was unable to rule out further dividend cuts if commodities prices continue to weaken in 2016.

"We're in the best possible position to face whatever is thrown at us this year and future dividend outcomes will really rely on the market conditions," he said.

Maintaining the long-running progressive dividend policy would have constrained the business and acted against shareholders' long term interests, he said.

The board expects total cash returns to shareholders over the longer term will be 40 to 60 per cent of underlying earnings.

Rio's underlying earnings more than halved to $US4.5 billion in 2015.

The miner said it will keep an eye out for high quality distressed assets in the current market, and plans to speak to credit rating agencies about its new plans after Standard and Poor's recently put the company on negative watch.

The company said its capital spending would be focused around key projects, including the Silvergrass iron ore mine in the Pilbara, likely to cost about $US1 billion.

Silvergrass is expected to have peak annual production of 21 million tonnes, and may be developed in two stages. 

It will contribute to Rio's goal of producing 360mt pa in the Pilbara - up from about 335mt expected in 2016.

The Silvergrass mine is likely to follow the Nammuldi Incremental Tonnes project.

Rio said the initial 5mtpa phase at Nammuldi commenced in the fourth quarter of 2015 and construction has commenced on the second phase, which will double output to 10mtpa by the end of 2016

Apart from Silvergrass, the only other projects listed in Rio's results presentation were the $US1.9 billion Amrun bauxute development in north Queensland, which was approved last November, and the Oyu Tolgoi underground mine in Mongolia.

Rio's big net loss was after $US3.3 billion of non-cash exchange rate and derivative losses, plus $US1.8 billion worth of asset impairments, mainly on the Simandou iron ore project in Africa.

The company has been cutting costs this financial year due to weaker commodities prices, particularly its key export of iron ore, which currently trades at a 10-year low.

Last month the mining giant said it had put a freeze on salaries for all employees as it continues to hunt for savings in the face of the commodity price slump.

Mr Walsh said the situation wasn’t temporary and the industry was moving to the new normal, which meant Rio had to stay one step ahead.

Last week, ratings agency Standard & Poor’s put Rio on negative watch, reflecting the challenging market conditions.

Fat Prophets Resources analyst David Lennox said Rio took a massive $7.7 billion hit from lower commodities prices, as its key iron ore earnings halved.

"Not many companies could withstand that sort of shock and still be around," Mr Lennox said.

There could be further dividend cuts if commodities prices continued to fall, he said.

"Once you've done it the first time it becomes easier the second time around," Mr Lennox said.

Significant job cuts could also be on the cards if commodity markets remain weak.

Rio shares were 1.2 per cent lower to $40.99 each at the close of trade.