February 11, 2016 / 6:53 AM / 4 years ago

UPDATE 3-Rio Tinto ditches boom time payout policy as profit plunges

* 2015 underlying earnings down 51 pct to $4.54 bln

* Promises 2016 dividend will be at least half of 2015

* Aims to cut $2 bln in costs over two years (Adds more CEO, CFO comments, analysts, updates shares)

By Sonali Paul and James Regan

MELBOURNE/SYDNEY, Feb 11 (Reuters) - Rio Tinto scrapped its generous payout policy in the face of a bleak outlook for the global economy after it slumped to a net loss for 2015 and posted its worst underlying earnings in 11 years.

The dividend decision also gives the world No. 2 miner flexibility to pursue acquisitions in future, analysts said, and Chief Executive Sam Walsh acknowledged his team was keeping an eye out for top-tier assets, particularly in copper.

“Getting the balance right between growth and shareholder return is important to us,” Walsh said on a conference call with analysts.

The payout policy change paves the way for arch rival BHP Billiton to take a similar step later this month, as miners come under pressure to shore up cash to weather the worst downturn to hit the sector in nearly two decades.

“Whilst 2015 was a volatile year, 2016 is shaping up to be even tougher. The macro outlook remains challenging,” Walsh told reporters.

The world No. 2 miner bowed to pressure from investors and credit rating agencies to give up its “progressive dividend” policy, under which it promised never to cut its payout from year to year, to better reflect commodity cycles.

Rio still managed to hold its 2015 full-year dividend steady at $2.15, although below market forecasts, at a time when all its peers are tipped to cut or suspend their payouts.

It promised to pay at least $1.10 in 2016 as a transition to the new policy, limiting any cut to 49 percent.

“This is a really nice way for the market to take on board that BHP will announce in two weeks it will cut (its dividend). Any doubt is gone,” said Peter O’Connor, an analyst at Shaw and Partners in Sydney. BHP is expected to cut its interim dividend at least in half.

Bernstein analyst Paul Gait believes the dividend and capital expenditure cuts also imply Rio might be acquisition ready.

“At today’s valuations, we don’t see any reason for a company to develop projects instead of buying existing assets. And Rio is the best suited with a strong balance sheet,” Gait said.

Chief Financial Officer Chris Lynch noted “some very good assets in what you’d describe as distressed balance sheets”.

“They’re not on the market as yet...but we do have capacity in the event we wanted to do it,” he said on the conference call. “We’ve got a watching brief on a lot of things and we’ll continue to do that.”

Rio Tinto shares were down 4 percent at 1127 GMT in London, while BHP Billiton was down 4.2 percent.


Walsh said uncertainty and a rapid drop in commodity prices over the past two months had hit all aspects of the global economy, calling for a shift in how the company spends its money.

Rio aimed to slice a further $2 billion off operating costs over the next two years, after having cut $1.3 billion last year, beating its own goal.

It also planned to slice capital spending by $3 billion more than previously flagged over the next two years, although Walsh said that would not be at the expense of its investments in a new iron ore mine in the Pilbara, an expansion of the Oyu Tolgoi copper mine and a new bauxite mine in Australia.

Rio reported a net loss of $866 million, hammered by $1.8 billion in writedowns, relating mainly to its Simandou iron ore project in Guinea, and exchange losses on debt.

Underlying earnings fell 51 percent to $4.54 billion in 2015 from $9.31 billion a year earlier hit by weaker iron ore, copper and aluminium prices, and in line with analysts’ forecasts.

Earnings in the six months to December shrank to $1.6 billion, just over half what it earned in the first six months of the year.

Standard & Poor’s and Moody’s have warned they may cut miners’ ratings, citing concerns over their dividend policies.

Rio Tinto is in a stronger position than its rivals as it has reduced net debt sharply over the past three years.

Rio’s net debt stood at $13.8 billion as of the end of December 2015, well below $14.8 billion expected by analysts.

Additional reporting by Eric Onstad in London,; Editing by Richard Pullin and Susan Thomas

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