Minings Big Pay Day

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What's going on?

Rio Tinto, one of the worlds biggest mining companies, announced on Wednesday that it would return much more cash to shareholders than expected but the stock still fell 3%.

What does this mean?

Like the entire mining industry, Rio Tinto had a tough time of things as commodity prices (e.g. iron ore) sold off from, roughly, 2012 until early 2016. Last year, following substantial losses, it cut its planned cash payment (a.k.a. dividend) to shareholders.


But over the past 18 months or so, it has greatly benefited from the significant pickup in the prices of iron ore and other industrial commodities. Meanwhile, it has also reduced its costs substantially. The result is a doubling of its profit versus a year ago. Its rewarding its shareholders by significantly increasing its dividend and buying back more of its own stock (which tends to push up the stock price).

Why should I care?

The bigger picture: The mining sector is getting competitive again which could affect investors.

All the major mining companies have seen their fortunes improve over the past year, including those that were most imperiled, like Anglo American and Glencore. As the sector recovers and profitability returns, miners are once again considering increasing their investment in future capacity (i.e. buying up mines from smaller mining companies). This has the potential to hurt profitability in the near term (i.e. as investment costs go up) and could threaten the juicy payouts that Rio Tinto and others are giving to shareholders.


For the markets: Rio Tinto and other miners remain highly exposed to the price of commodities and China.

What goes up can certainly come down, and iron ore and other commodities have gone up a lot lately, largely due to Chinas rebounding economy (China is the worlds biggest consumer of industrial commodities). If that were to reverse, commodity prices would almost certainly fall once again which is why mining investors always keep a close eye on China.

Originally posted as part of the Finimize daily email.

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