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Surging Q2'19 iron ore price drives diversified miners' dividends

Strong iron ore prices helped drive Rio Tinto and BHP Group's growing profits and dividends in the second quarter while also spurring talk of Vale SA rebooting distributions.

Iron ore prices breached US$100/t in June, and while prices subsequently pulled back, the surge helped lift margins for major iron ore miners in recent earnings reports.

Rio Tinto raised shareholder returns in the first half to US$3.5 billion from US$2.2 billion in the same period of the prior year. Rio Tinto CEO Jean-Sébastien Jacques said on an Aug. 1 earnings call that iron ore prices drove the company's earnings in the first half.

"Our financial performance was very strong, thanks to a robust iron ore pricing environment," he said.

The diversified miner's consolidated sales revenue totaled US$20.72 billion in the first half, increasing year over year from US$19.91 billion.

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Likewise, BHP lifted shareholder returns with a record US$2.35 per share payout in fiscal 2019. A fully franked dividend of 78 U.S. cents per share for the second half came on the back of US$8.31 billion in net profits for the fiscal year, up 124% on an annual basis.

In 2019, BHP produced about 237.96 million tonnes of iron ore, in line with 2018 production.

On a recent earnings call, BHP CEO Andrew Mackenzie pointed to strong Chinese appetite for its iron ore and metallurgical coal products, despite the overhang of an ongoing U.S.-China trade war.

Among other top iron ore producers, Vale management downplayed potential for dividends as it continues to contend with the fallout from the Feijao tailings disaster. Nonetheless, on an Aug. 1 earnings call, CFO Luciano Pires pointed to coming cash flows that will help the miner build a "nest egg" for shareholder distributions once it works through other liabilities.

BMO Capital Markets analyst Edward Sterck said in an Aug. 2 note that there may be "scope to return US$10 billion or more to shareholders in 2020 for a yield [of more than] 15%." Sterck also said Vale management is "understandably playing down any conversation around returns."

On the back of a US$1.5 billion write-down stemming from the tailings dam failure, Vale reported a US$133 million second-quarter loss. In the same period the year before, it had a US$76 million profit. Had it not been for the rise in iron ore prices, which analysts partly attributed to Feijao supply disruption, Vale's loss might have been worse.

Vale's iron ore production dropped 33.8% year over year to 64.1 million tonnes in the second quarter, reflecting mine suspensions in Brazil.

Fortescue Metals Group Ltd., a major iron ore producer, plans to report fiscal 2019 results Aug. 26.

In other earnings reports, Cleveland-Cliffs Inc.'s net income fell 2.6% to US$160.8 million in the second quarter from US$165.1 million a year earlier. Iron ore sales climbed to 6.2 million long tons, from 6.0 million long tons in the second quarter of 2018, while product sales and services revenue rose to US$747.2 million from US$714.3 million.

On a July 19 earnings call, Chairman, President and CEO Lourenco Goncalves described the surging iron prices as the "new normal." Goncalves also highlighted Cleveland-Cliffs' recent share buybacks, thanking sellers of the company's stock. "You sold your shares very cheap," he said.

Labrador Iron Ore Royalty Corp.'s royalty revenue in the second quarter surged year over year to C$52.6 million from C$5.1 million after operations were hit by a nine-week strike in 2018. Higher iron ore prices in the first half also lifted revenues. The company declared a regular dividend of 25 Canadian cents per share and a special dividend of 65 cents per share.