Goodness, now Rio finds it can afford a dividend

August 20, 2009

Can it really be a mere six months since Rio Tinto agreed to sell its birthright to Chinalco, losing its chairman-designate in the process? Indeed it can, and it shows how fast things change in the whacky world of commodities. In February, the directors panicked that the business might run out of cash; now they are signalling that they should be able to find $1.75 billion, or around $1.15 a share, for a dividend next year.

In hindsight, it looks frightfully clever of them to use the balance sheet of China Inc. (for a mere $195 million break fee) to buy time to find a better way out of the financial hole they dug. After all, the Chinalco deal could not be consummated without shareholder approval, which could not be sought until various regulators round the world had agreed it, a process bound to take many months.

In fact, it looks as though they got the right answer for the wrong reason, allowing the new, post-Chinalco chairman Jan du Plessis to brag about “renewed financial strength and a leaner cost base.” Even so, it’s a bit rich for the directors to boast about “delivering on commitments made in December 2008”.

Thanks largely to last month’s thumping $15 billion rights issue, debt is no longer a problem. All the debt incurred to overpay for Alcan in 2007 has now been repaid, so Rio can get on with the important task of rebuilding its relationship with China, the most important customer for its iron ore. There is much to do here, following the arrest of its negotiating team, but the heat seems to have gone out of the confrontation, and neither side can do without the other.

There are no nasty surprises in Thursday’s half-year results, which given the recent history will come as a relief to shareholders. In the long run, Rio’s annus horribilis will do no end of good, as the board has seen how quickly the finances can unravel, and how important it is to look after the customer, even in the commodities business.

The joint venture with BHP Billiton in Pilbara, a tie-up which investors have wanted for years, almost certainly ends the prospect of BHP returning with a full-bloodied takeover, but the $10 billion of gains from putting the operations together makes a bid otiose.

After such an exciting year, no one will blame chief executive Tom Albanese for sounding a note of caution, but as the world’s appetite for coal and metals grows, Rio’s future looks a great deal better than its recent past.

Neil Collins is a shareholder in Rio Tinto.

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