Rio cost cuts bolster payout prospects

Rio Tinto chief executive Sam Walsh is charting a course to potentially bolster cash returns to investors in the world's second-biggest mining company after cutting US$2 billion of costs ahead of schedule.

"What I've done for the board is to provide them options - options to pay down debt, options to pay dividends, and so on," he said. "The optionality will most definitely be there. Exactly how the board determines to make shareholder returns and the amount - that's up to the board."

The 22-year company veteran has slashed costs, curbed spending plans and driven productivity gains since becoming chief executive in January amid an industrywide push to preserve profitability as some commodity prices slide. Rio could return as much as US$3 billion of surplus cash to investors in 2016, Goldman Sachs analysts said this month.

"There's no point in reducing costs, there's no point reducing your capital allocation unless it actually flows through to your bottom line and flows through to your debt and flows through to your earnings," said Walsh, who previously headed the company's iron-ore unit, its most profitable division.

Rio, which reported a US$3 billion net loss for 2012 after writing down the value of acquisitions, might choose to return cash through special dividends or a share buy-back, Credit Suisse analysts wrote on December 3. Planned reductions in net debt to about US$15 billion by the end of 2014 suggested surplus cash beyond its usual dividend could be paid out in the first half of 2015, UBS analysts said.

The firm paid about US$3.3 billion in dividends for 2012, 15 per cent more than a year earlier. It completed a US$7 billion share buy-back during the first half of last year.