Picture: REUTERS
Picture: REUTERS

Melbourne/London — Rio Tinto Group’s best profit in three years and a record dividend is yet another sign that miners are reaping the benefits of a surge in commodity prices.

Yet the sheer size of Rio’s cash flow is starting to raise another question: how else will the world’s second-biggest mining company invest all its money? The company has so far focused on rewarding shareholders and on Wednesday, it promised a full-year dividend of $5.2bn and an additional $1bn stock buyback.

However, there are some hints that Rio could use its fortress of a balance sheet to start investing in other mining assets. CEO Jean-Sébastien Jacques said the company is watching for deal opportunities and screening for new commodities with a new ventures unit.

"We have got a lot of firepower in our balance sheet," chief financial officer Chris Lynch said in a phone interview. "We’ve got good capacity, we are looking at a lot of different things — but we are going to stay disciplined."

Outside of core commodities such as copper, iron ore and aluminium, "we’d just need to see something that we can see ourselves being successful in. This doesn’t preclude many things — in the main, we’d be confident to back our ability in most mining situations," Lynch said.

Rio, which delivered almost $10bn of cash returns to shareholders in 2017, could improve on that as cash builds. "The company is in very good shape, and I certainly wouldn’t rule out the idea of even better returns next year," he said.

Arizona copper

In December, Rio approved spending $368m to continue the future development of the Resolution copper project in Arizona, a joint venture with BHP Billiton, according to the statement on Wednesday.

Shareholders may be willing to support Rio if it moves to add a different commodity to its portfolio — mainly based around copper, iron ore and aluminium, according to a report from UBS Group. Rio dropped out of the bidding for a $5bn stake in Sociedad Química y Minera de Chile, one of the world’s top lithium producers, people familiar with the matter said last month.

"We think the market is ready, but the price paid is key," said Glyn Lawcock, a Sydney-based UBS analyst, in a research report on Monday. Rio is "down to basically three commodity pillars, is the market ready for Rio to take on a fourth?". Other analysts say the company will likely stick with its current strategy.

Shareholders may be willing to support Rio if it moves to add a different commodity to its portfolio — mainly based around copper, iron ore and aluminium

The shares added 1% to 3,883p in London trading on Wednesday. In the past year, the stock has risen 13%.

"It’s a very consistent message and strategy which shareholders will like," said Richard Knights at Liberum Capital. "Given the multi-generational nature of their asset base, mainly iron ore and aluminium, they can keep this up a long time."

Jacques emphasised that the company will prioritise cash flows, rather than raw material volumes or market share going forward. "We’re not interested in being the largest. It’s about being the most profitable," he said in an interview on Bloomberg Television.

The company reported operating cash flow of $13.9bn for 2017, up 64% from the previous year. Underlying profit was $8.6bn in underlying profit for 2017, a 69% jump from 2016. The results were in line with estimates compiled by Bloomberg.

Investec’s Hillcoat said it’s unlikely that Rio will embark on any "multi-billion-dollar expansions" to chase mergers and acquisitions growth or pay a premium for other commodities, such as copper, given the industry’s history of overspending.

"The only way to rebalance their portfolio is to take on additional growth in other commodities like copper, either through acquisitions where they’ll have to pay a premium or through expansion, but they don’t really have too many meaningful growth options there," he said.

With assistance from Matthew Burgess, Thomas Biesheuvel and Francine Lacqua

Bloomberg