The latest Rio Tinto (ASX:RIO) dividend is the biggest in Australian history. What’s next for the miner?

If commodities stage another rally, there could be positive signs for the miner.

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Key points

  • A buoyant commodities sector and strong demand led to Rio Tinto declaring record free cash flows in 2021, with a record dividend of US$10.40 per share
  • One expert says the miner is set to grow earnings further if its key metals markets rally in 2022
  • The Rio Tinto share price is up 18% this year to date. 

The Rio Tinto Ltd (ASX: RIO) share price is trading even on Tuesday morning at $118.15, just under its previous close of $118.17.

The Rio share price has been on the receiving end of a now two-year commodities rally that’s helped ASX miners realise the highest levels of free cash flow in decades.

Rio, with its market-leading position and market capitalisation of $43.8 billion dollars, is front and centre stage amid the rally. The company has just posted some of its highest full-year earnings results since changing its name to Rio Tinto in 1997.

The mining giant recorded an 88% leap in free cash flow to US$17.66 billion. This enabled the board to declare a similar 87% jump in the total dividend to US$10.40. Yes, that’s ten dollars and forty cents — the biggest payout recorded on the ASX’s books.

What’s next for Rio Tinto?

Rio’s record-beating results came on the back of the record-beating commodities rally that’s been happening since 2020.

Commodities across the board saw a huge uplift and have remained buoyant, albeit with some minor setbacks along the way.

According to Tyndall Asset Management’s Brad Potter, Rio’s performance in 2021 hinged on this rally in metals last year.

“Rio benefited from very strong commodity prices right across the spectrum during 2021,” Potter said, speaking to an episode of Investment Insights on Livewire.

“It wasn’t just a story of iron ore, though, with their copper and aluminium divisions also reporting very strong results, cash flows and dividends were a record, and the balance sheet remains in a net cash position, so the company is in a very strong place.”

This kind of fundamental momentum should bode well for the company throughout 2022, Potter says, especially if iron ore and copper markets stage another rally to set new record highs.

Undoubtedly, this would also bode well for the Rio Tinto share price. The company is seen as a ‘price taker’ on these markets. That is, it must accept what bids are offered in the spot or forward markets for metals.

We can see this relationship on the chart below. It shows the Rio Tinto share price plotted against the IAS iron and steel index and iron ore futures up to the end of February 2022.

TradingView Chart

As such, if commodities such as iron ore continue to set new highs, this is sure to beef up revenue, operating profits, and free cash flow for Rio, according to Potter.

“The expectation going forward though is that in 2022 we should see another strong year of earnings, cash flow, and dividends as commodity prices are expected to remain high,” he said.

This is equally important seeing Rio’s cost base widened substantially last year. Its costs are now running ahead of its competitors.

“Operationally Rio was a little disappointing, with costs and volumes not performing to expectations,” Potter said.

“Rio is now the highest cost producer in the Pilbara, from a position of where they were once lower than BHP and Fortescue.”

Rio Tinto share price snapshot

After taking a beating in 2021 and faltering 8% over the last 12 months, the Rio Tinto share price is soaring 18% higher in 2022.

It’s gained 6% in the past month alone.

By comparison, the S&P/ASX 200 Index (ASX: XJO) has dropped 4% since the start of 2022.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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