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Rio Tinto's fourth quarter production update gets mixed reception

Last updated: 08:50 20 Jan 2015 GMT, First published: 09:50 20 Jan 2015 GMT

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2014 was viewed by many as a tough one for resource companies, but not for Rio Tinto (LON:RIO), according to its chief executive.

"We have had a successful year of production, capped off with a robust fourth quarter," said Sam Walsh, chief executive of Rio Tinto.

"Output is in line with our targets across all of our major products," he added, while acknowledging the company is operating in a challenging market.

Iron production for the whole of 2014 was a record 295.4mln tonnes.

The fourth quarter saw iron ore production rise 3% from the preceding quarter to 79.1mln tonnes, but coal output declined, with production of hard coking coal down 14% quarter-on-quarter (QoQ) while output of semi-soft and thermal coal was down 10% QoQ.

Global iron ore shipments of 302.6 million tonnes - Rio Tinto's share was 239.9 million tonnes - for the whole of 2014 were up 17% year-on-year.

"In a challenging market Rio Tinto remains focused on operating and commercial excellence to leverage our low-cost position and maximise value for shareholders," Walsh told shareholders.

Helal Miah, investment research analyst at The Share Centre, said the fourth quarter numbers were roughly in line with expectations.

“These production figures are on the whole encouraging in terms of how well run Rio’s operations are; however, the declining commodities environment, particularly iron ore, is of concern and will only lead to lower earnings. All the major miners are intent or being a low cost producer and this will not help the cause for higher iron ore prices," Miah said.

“Despite this, Rio Tinto remains a solid operation with good cash flows and an attractive dividend. It will be of interest to value investors who are expecting good long term growth in China and a recovering global economy,” the analyst concluded.

Broking heavyweight JP Morgan Cazenove described the fourth quarter production numbers as "mixed" and noted there were no clues offered on capital management.

"We maintain our Overweight [rating] ahead of the FY14 results. We expect the company to announce a multi-
billion dollar, multi-year capital management initiative, with 2014 gearing at 2% (US$16.4bn net debt)," Cazenove said.

Caz expects the company will announce a share buy-back programme, though recurring special dividends may also be looked at by the board.

With the company's dividends set to move beyond half of retained earnings, there is little incentive for the board to bump up the basic dividend, Caz suggested.

Investment house Investec said the fourth quarter update should provide further confidence to the market in Rio Tinto as an operator.

Shares in Rio Tinto eased 0.3% to £28.48 on the results.

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