Rio Tinto and Fortescue Metals Group are confident they will keep growing their Pilbara iron ore operations despite a concerted push by many investors for more cash to be returned.
Rio chief executive Sam Walsh told an analyst briefing in Sydney that the miner’s board was likely to approve $US4.3?billion of spending on iron ore mine expansions needed to take capacity to 360?million tonnes by 2015.
And at the opening of Fortescue’s Firetail mine in the Pilbara, chief executive Nev Power outlined plans to boost production by a further 10?per cent to 170?million tonnes at a minimal cost after it completes a $US9?billion expansion plan by the end of this year.
Both mining companies indicated they are well aware that investors are seeking higher dividends and share buybacks, particularly after Woodside Petroleum issued a special dividend and raised its payout ratio last month.
But Fortescue chairman Andrew Forrest said the miner could be “both a yield and a capital growth company. It doesn’t have to be one or the other.”
Fortescue disappointed investors in February when it held back on paying an interim dividend despite paying one six months earlier. But it unveiled plans to move to a fixed payout ratio of 30 to 40?per cent in the future.
Mr Forrest, who owns 33?per cent of the miner he founded, said Fortescue would resume dividends as soon as it was “responsible” to do so.
‘Best project in the Rio portfolio’
Mr Walsh admitted to analysts that in recent investor meetings, some fund managers had questioned whether Rio should proceed with its iron ore expansion or return the cash to shareholders. Rio has been looking to sell non-core assets and clamp down on costs in an effort to maintain a single-A credit rating currently on negative watch.
But analysts that attended the briefing said it appeared the expansion was likely to be approved by the board in the fourth quarter despite some recent market speculation it could be delayed.
“The message was, barring a black swan event in North Korea, the project is likely to go ahead,” JPMorgan analyst Lyndon Fagan said. “It was confirmed as the best project in the [Rio] portfolio. We would be surprised if they cancelled that project despite the noise around.”
However, another analyst said his view was that delaying the project would be a “really good signal” to the market about capital discipline. Rio has already approved the necessary infrastructure spending and will lift its production capacity from 290?million tonnes by the third quarter of this year.
Mr Walsh and new chief financial officer Chris Lynch met with analysts on Monday and were joined by Rio chairman Jan du Plessis at an earlier investor meeting. It is the first round of in-person briefings Mr Walsh has done in Australia since taking on the top job in January. The miner’s annual meeting is in Sydney on Thursday.
On to the next phase
At the Firetail mine opening, Mr Power indicated the company’s expansion to 155?million tonnes of annual production would mark the end of the company’s major construction phase.
He foreshadowed that would be followed by an “efficiency” phase that could lift production by a further 5?per cent to 10?per cent. “We see the next phase beyond 155?[million tonnes per annum] as optimising, de-bottlenecking and increasing the productivity of the assets that we have,” Mr Power said. “The quality of these assets is fantastic. There is a lot of incremental volume that can be put through these facilities with no additional capex.”
Fortescue is expected to approve construction of a $US250?million fifth berth at Port Hedland in the 2014 financial year to boost its port capacity to around 180?million tonnes.