Rio Tinto has good news for income seekers

Rio Tinto did rather better than expected in 2014. Yes, underlying earnings fell, but not by as much as feared, and at least volume is up and costs down. It's all the more impressive given that the price of iron ore, which makes up almost three-quarters of cash profit, slumped by 30% last year. The miner slashed net debt by almost a third, too, and a double-digit increase in the dividend has kept shareholders happy.

A jump in volumes worth $3 billion (£1.95 billion) capped the decline in revenue at Rio to 7% and $47.7 billion, ahead of consensus estimates. Underlying earnings surprised, too, down just 9% at $9.3 billion. Much lower write-downs and foreign exchange losses meant net earnings actually rocketed by 78% to $6.5 billion.

Cash profit margin, meanwhile, was steady at 39% as higher volumes and lower costs offset the $4.1 billion post-tax impact of weaker prices. "The structure of the commodity cost curves should result in margins for low-cost producers remaining above the average levels seen before the commodity-intensive phase of China's growth started just over a decade ago," says Rio.

Slashing capital expenditure by $4.8 billion, or 37% to just $8.2 billion brought net debt down from over $18 billion to a more modest $12.5 billion.

It means Rio can increase the full-year dividend by 12% to 215 cents per share and finance a $2 billion share buy-back, in line with City expectations of $4 billion over two years. And Rio will cut costs by a further $750 million in 2015 and reduce capex to below $7 billion. It will be no more than $7 billion in 2016 and 2017.

Across the divisions, earnings at the core iron ore operation were down only 18% last year to $8.1 billion despite the much larger slump in prices. Record volumes from Pilbara worth $1.3 billion of profit, plus cost cuts and a weak Aussie dollar helped here. The smaller energy unit lost $210 million, but copper made $912 million, up 11%, while aluminium more than doubled profit to over $1.2 billion.

After rising 3% Thursday to 3,063p, Rio shares now trade on about 12 times forward earnings and offer a dividend yield of 5%. Ahead of the results, UBS reckoned they were worth 3,300p based on 0.8 times net present value (NPV), in line with peers. "We do however expect the stock to be range bound until the commodity price outlook improves."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.