By Sonali Paul
MELBOURNE (Reuters) - Anglo-Australian miner Rio Tinto RIO.AX RIO.L raised hopes it could sharply boost cash returns to investors after topping market forecasts with a 21 percent rise in first-half profit.
The world's no. 2 miner slashed costs and cut capital spending quicker than expected, at the same time as it boosted shipments of iron ore by a fifth, which helped it offset a 29 percent slump in prices of the steelmaking ingredient this year.
Strong cash flows allowed Rio to cut net debt to $16.1 billion (9.56 billion pounds), putting it in line with a mid-teens range it wanted to hit before it would consider returning capital to shareholders. That boosted expectations for a share buyback in February, when it announces full-year results.
Chief Financial Officer Chris Lynch said there was a strong chance of good news on returns in early 2015, adding the company was no longer under pressure to cut debt.
"These solid foundations will result in materially increased returns for shareholders - it's written in black and white in our press release," CEO Sam Walsh said on a call. "A leaner and meaner Rio Tinto is here to stay. Watch this space."
Investors and analysts were impressed the company was able to boost profit and cut net debt by $2 billion even as revenue fell slightly, and said expectations were high for fat returns to shareholders in February.
"They need to deliver on those expectations and they should have the capacity to do that ... So show me the money," said Rohan Walsh, an investment manager at Karara Capital, which owns shares in Rio Tinto.
Reversing years of huge spending on acquisitions and new mines, Walsh, 18 months in the top job, is on track to meet a vow to cut costs, sell assets and slash debt in order to reward investors with big returns even as commodity prices cool.
At the same time, he has focused on ramping up production from its iron ore mines in Australia's Pilbara, flooding the market with low-cost, high-quality iron ore that has weighed on prices and hurt smaller producers.
Rio said it expects supply of 125 million tonnes of high-cost iron ore to be taken out of the market in 2014 as lower-grade producers cut output.
"Now it's not a time for one of the best iron ore producers in the world to take a step back. Now it's time for others to really feel the consequence of the price against their operating costs and to then make decisions," Walsh said.
Rio shares traded up 1.8 percent at 3,451 pence while the broader market .FTSE was down 0.3 percent.
Underlying earnings rose to $5.12 billion in the six months to June, up from $4.23 billion a year earlier. Seven analysts polled by Reuters had on average forecast $4.78 billion.
COST CUTS
Profit from iron ore, which made up 92 percent of underlying earnings, rose 10 percent to $4.68 billion, while copper earnings rocketed 71 percent to $594 million. Its long-suffering aluminium business reported a 74 percent rise to $373 million.
Rio managed to cut a further $929 million in costs in the first half, six months ahead of schedule, adding to $2.3 billion in costs cut last year, and flagged it would be able to pare a further $1 billion by the end of 2015.
It also cut its forecast for capital spending in 2014 to $9 billion from an earlier estimate of $11 billion.
"For me what was really positive was lower than anticipated net debt and much lower than expected capex," said Canaccord analyst Peter Mallin-Jones. "That opens up the possibilities for increased cash to shareholders sooner than anyone was expecting."
Rio said it would pay a first-half dividend of $0.96, in line with policy to pay half of the previous year's dividend.
While celebrating the success of its iron ore expansion, Rio Tinto last week exited its disastrous investment in coal assets in Mozambique, selling most of the Riversdale business it paid $3.7 billion for in 2011 for just $50 million.
"It was not a good project," Walsh said. "We've been working hard to turn the business around, but quite frankly, when we looked at the numbers, the best option was to close the book."
Rio was not looking at any big acquisitions now, he added.
In copper Rio warned that the market had moved into surplus as new mines had come on stream.
Walsh was optimistic Rio could resolve a dispute with Mongolia over the expansion of its Oyu Tolgoi copper and gold project ahead of a September deadline for securing finance, a project analysts and investors are closely watching.
Rio has budgeted for some capital spending this year on the mine, where it halted work a year ago due to disagreements with the government.
"If there were a 12 month deferment of that project than we would be faced with an impairment, but we are focused on ensuring that we bring that project on as early as we can," Walsh said. "Everyone wants that project to proceed. It's just about how you share the pie."
(Additional reporting by Silvia Antonioli in London; Editing by Muralikumar Anantharaman and David Holmes)