Rio Carnival

Rio Tinto shares drop 3%

Image source: nano-stocker, Levent Konuk - Shutterstock

What's going on?

Anglo-Australian mining giant Rio Tinto is sharing the love: it’s celebrating its highest half-year profit since 2014 by distributing an extra $1 billion to shareholders.

What does this mean?

The price of iron ore has risen over 70% this year, after a Brazilian dam disaster in January saw authorities massively curtail supply from the world’s top exporter, Vale. Rio’s rival said on Thursday it produced 34% less iron ore last quarter than it did a year ago.

While Rio’s also cut production twice in 2019, higher prices more than made up for lower volumes: iron ore sales were responsible for three quarters of Rio’s profit, up from 60% in 2018. But it’s not all gravy: investors watching iron’s price tick up already expected a bumper payout, and worries about future productivity and lower Chinese demand saw Rio’s shares fall 3% on Thursday.

Why should I care?

For markets: Leave the stock; take the cannoli.
Rio plans to pay its investors a total of $3.5 billion in cash dividends, but it won’t buy back shares as it has in previous years. That’s not because the company lacks self-confidence, mind you. Back in 2008, concerned regulators stipulated that Chinese aluminum maker Chinalco could own no more than 15% of Rio, Australia’s fifth-largest employer. $10 billion of share buybacks since 2017 have helped bolster the value of Rio’s remaining public stock, but they’ve also pushed Chinalco perilously close to that 15% limit. Any more buybacks might’ve seen the Chinese company forced to sell against its will.

The bigger picture: Steel mad with you.
China is the world’s biggest buyer of iron ore, which it uses to make enormous amounts of steel – over half the global total, in fact. But the rising cost of ore has hit steelmakers’ profits, and dwindling stockpiles have prompted some Chinese companies to call for government intervention. They’re not alone: steelmaking giant ArcelorMittal reported its worst quarterly profit in three years on Thursday, partly thanks to higher iron prices.

Originally posted as part of the Finimize daily email.

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