Rio Tinto upbeat in face of BHP bid

Rio Tinto, the Anglo-Australian mining group, on Wednesday lifted its full-year dividend by 31 per cent and painted an upbeat picture of its prospects in the face of a hostile $147bn (£75bn) takeover bid from rival BHP Billiton.

Growth in full-year underlying earnings beat analysts’ expectations while the dip in net profits was smaller than forecast.

Paul Skinner, Rio chairman, said BHP’s improved all-share offer “still fails to recognise fully the underlying value of Rio Tinto’s quality assets and prospects”.

He declined to speculate on the value of an offer that would attract board interest, but pointed out that China’s Chinalco and Alcoa of the US had paid £60 a share in cash for their 9 per cent stake in the company.

Rio shares were 131p lower at £53.92 in early London trading while BHP fell 1.9 per cent to £15.25. BHP last week increased its offer to 3.4 BHP shares for every Rio share.

Tom Albanese, Rio chief executive, said the move by Chinalco and Alcoa “was a surprise to us” and that Alcoa had said it had no intention of seeking a place on Rio’s board.

“BHP needs Rio more than Rio needs BHP,” Mr Albanese argued. Rio’s three main products are copper, iron ore and, since the acquisition of Alcan last year for $38bn, aluminium. These offered better prospects for growth than BHP’s portfolio, which was exposed to nickel and oil, he said.

Rio reiterated progress in the expansion plans and delivery of value to shareholders that it outlined in its November defence strategy. Capital expenditure rose 25 per cent to $5bn and capital commitments topped $8bn. Cash flow was strengthened and a target single-A credit rating announced.

In 2008-15 Rio’s volume growth rate will be twice that of BHP, said Mr Albanese, adding: “We are accelerating away”.

The group said the outlook for base metals and minerals remained strong. “With supply side constraints across the mining industry unlikely to ease in the near future, commodity prices are expected to stay high by historic standards in 2008 and well beyond,” Mr Skinner said.

Mr Albanese added: “We’re aiming for new highs in 2008. In an era of rising demand and rising prices, the value of our assets stands out. This is especially clear in products such as iron ore and aluminium where prices are based on high marginal costs of production in China.”

He said Rio was on target to reach iron ore production of 220m tonnes in 2009. Rio’s iron ore assets, particularly those in the Pilbara region of Western Australia, are one of the main reasons it has attracted BHP’s attention.

Underlying earnings before interest, tax, depreciation and amortisation rose 11 per cent to a record $13.9bn while cash flow from operations increased 15 per cent to $12.6bn. The group recorded a 2 per cent fall in net profits, from $7.44bn to $7.31bn, in the year that ended December 31. Analysts had on average expected net profits of closer to $7bn.

Diluted earnings per share rose from just under $5.56 to $5.66.

On a like-for-like basis, Rio said it achieved annual production records for iron ore, bauxite, aluminium, refined gold and copper.

Commodity price movements increased underlying earnings by more than $1.36bn while volume growth provided a $516m boost. On the negative side, currency movements decreased earnings by more than $400m, freight and demurrage (charges for delivery delays) by $163m and energy costs by another $82m. Non-cash costs rose by $201m.

Net debt rose to $45.2bn from $42.7bn.

Rio this week agreed to sell the Greens Creek mine in Alaska for $750m (£385m), the first asset to be sold as part of a plan to dispose of at least $15bn of non-core assets. The company said last year it hoped to raise $15bn-$30bn from asset disposals to help pay for its acquisition of Alcan. It said on Wednesday that all the planned disposals were well under way.
Copyright The Financial Times Limited 2008