Rio Tinto Leads A Surprisingly Strong Mining Sector

Date: Jan 25, 2019

Asset sales, cost cutting and reasonable commodity prices are combining to create the best financial conditions in decades for big mining companies as demonstrated by this week’s December quarter production report from Rio Tinto.

While generally in line with investment bank forecasts the final quarter production numbers have poised the Anglo-Australian miner for a bumper 2018 profit when it reports next month.

While other sectors of the market are concerned about growth prospects the biggest worry for Rio Tinto management is how to allocate a pile of cash building in its bank account.

Cash Building

The best illustration of how Rio Tinto has moved from being a company pressured by low commodity prices and uncertainty about future demand for its primary raw materials (iron ore, copper and aluminum) is the rate at which it has retired debt.

Three years ago, after a major mine development phase Rio Tinto was carrying $14 billion in debt. At the end of 2018 it was net debt free, according a number of investment banks, with a strong cash build-up underway and expected to reach $10 billion in 2021.

What management chooses to do with the cash is a question shareholders will be watching carefully with the expectation that a substantial dividend increase or expanded share buy-back program could be on the way.

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