Rio, BHP output boosts payout hopes

Strong performances and high commodity prices could provide billions of dollars to Rio Tinto and BHP shareholders.

Rio Tinto CEO Jean Sebastien Jacques. Picture: Britta Campion

Strong December quarter performances amid high commodity prices could provide billions of dollars of extra dividends to Rio Tinto and BHP shareholders, with the potential for asset sales to boost these further.

Rio and BHP will deliver production reports this week and analysts are expecting strong operational performances as prices of iron ore, copper, coking coal and oil finished last year at much higher price levels than expected.

Rio will kick off mining production reports tomorrow when it delivers the fourth quarterly production report of its calendar reporting year, which will be the final piece in analysts’ full-year profit and dividend estimates.

“We forecast record iron ore shipments and a strong rebound in mined copper production (for Rio),” Deutsche Bank analyst Paul Young said.

Mr Young expects December-quarter West Australian iron ore production of 87.7 million tonnes, up 3 per cent from the previous quarter and bringing full-year production to a guidance-meeting 330 million tonnes. Quarterly copper production is tipped to grow 13 per cent to 136,600 tones.

“This implies strong cash flow for the fourth quarter,” he said.

Since the start of October, iron ore prices are up 28 per cent to $US75 a tonne and oil is up 21 per cent to nearly $US70. Copper is trading at $US7110 per tonne, near two-year highs.

In November, consensus forecasts posted on Rio’s website were showing full-year earnings expectations of $US8.45bn, up 15 per cent from last year.

A full-year dividend of $US2.73 ($3.45) per share, up on $US1.70 in 2016 and beating the 2015 record of $US2.15, is forecast.

But Rio chief Jean-Sebastien Jacques has net debt where he wants it and is making shareholder returns the differentiator between his company and its major rival, meaning returns could be stronger.

Macquarie analyst Hayden Bairstow is expecting a $US1.95 final dividend, bringing the full-year dividend to $US3.05.

That is about $US500m more than consensus.

For 2018, analysts see dividends slipping back to $US2.39.

But Mr Bairstow notes these forecasts are conservative, with spot commodities prices now 75 per cent higher than consensus estimates.

Deutsche Bank estimates Rio shares would deliver a 4.1 per cent yield in 2017 and 2018, compared to 3.4 per cent yield at BHP in 2017-18 and a 3.6 per cent yield next financial year.

At Rio, there is also potentially more than $US6 billion of sales proceeds that could be returned to shareholders in the same way the company last year returned most of the sale proceeds from the $US2.7bn sale of its Hunter Valley coal assets.

Last week, Rio announced it had received a $US500m binding offer from Sanjeev Gupta’s Liberty House for its Dunkerque smelter in France, in a deal due to close in the June quarter.

And with aluminium prices near five-year highs, Macquarie says Rio might be able to get a good price from its Australian aluminium smelters, known as PacAl, which it has been trying to sell for the past six years.

“A potential capital windfall from the divestment of PacAl remains a possibility over the near-term, with persistently strong aluminium prices offering a favourable backdrop to the sales process,” Mr Bairstow said

The unit is valued at $US1bn on Rio’s books and Macquarie gives it a value of $US1.6bn. But Macquarie said it could fetch $US2.8bn to $US3.9bn, based on peer trading multiples. Rio is also trying to sell its Queensland coking coal mines, which could net another $US2bn.

BHP reports its second-quarter result on Thursday. It is in the middle of its 2017-18 financial year and is not likely to provide any dividend surprises until its full-year report in August.

But analysts tracked by Bloomberg have boosted their 2017-18 full-year dividend forecasts to US94c per share, up from about US72c when the last full-year dividend came out, This represents $US1.17bn of extra dividend payments.

Deutsche Bank expects BHP to report a record 70.9 million tonnes of iron ore production from the Pilbara in the December quarter, up 10 per cent from the previous quarter.

The bank is forecasting 11.2 million tonnes of coking coal, up 7 per cent and 46.7 million barrels of oil equivalent of petroleum, down 7 per cent.

Prospects for a windfall payout at BHP lie with its plan to sell its underperforming US shale business in the next 18 months, something higher oil prices will no doubt help. Analysts hope BHP can salvage $US8bn to $US10bn from the sale, which could make it back to shareholders’ pockets.

Also providing the prospect of better returns at BHP are its stake in the Samarco iron ore mine in Brazil, which has been mothballed since November 2015, when 19 people died after a tailings dam collapse.

While BHP is hosing down talk it wants to sell its 50 per cent stake to partner Vale, reports from Rio de Janeiro keep appearing.

The latest unsourced report, at the weekend from Bloomberg, said BHP was asking for about $US1bn for the stake.