Rio Tinto cautiously optimistic

Rio , the world's No. 3 miner behind BHP and Brazil's Vale , forecast commodity prices will recover but may be volatile as governments rein in stimulus spending.

Investors took Rio's remarks as less cautious than BHP's, and saw Rio's decision to step up capital spending after a hefty pullback last year as a sign of its renewed confidence following last year's debt crisis at the company.

"Rio has also said they plan to spend up to $6 billion (3.8 billion pounds) on capital expenditure in 2010 and that is a good sign, because it suggests they're not tied up for cash and they're seeing opportunities in the market," said Peter Chilton, analyst at Constellation Capital Management, which owns Rio shares.

Rio Tinto shares in London gained 3.84 percent to 3260 pence at 10:50 a.m., outpacing a 3.48 percent gain in the UK mining index. They were the sixth strongest performer in the blue chip FTSE 100 index <.FTSE> last year, surging 175 percent, but have shed 3.5 percent this year.

"A good set of numbers and slightly better versus expectations than the other miners this reporting season," said analyst Tim Huff at RBS said, adding that

Rio resumed paying a dividend for the first time in a year. At 45 cents a share, it was 19 percent lower than last year's final dividend but roughly in line with forecasts.

CEO Tom Albanese said the company had come out of the downturn leaner and fitter, and promised that dividends in 2010 would be at least in line with 2008 before the crisis hit.

BHP also beat forecasts when it posted results on Wednesday, but was more wary about global recovery, holding off from a share buyback.

Rival Anglo American is due to report on February 19.

STRONG CHINESE DEMAND

The turnaround follows a tumultuous year when Rio spurned a $19.5 billion tie-up with China's Chinalco, sold assets and new shares to more than halve its $40 billion debt, and agreed to combine iron ore operations with former hostile suitor BHP.

Investors expect Rio to save cash for growth projects, like expanding in iron ore in Australia and copper in Mongolia.

"They're a bit like BHP and keeping their powder dry in case things don't travel as well as they can," said Michael Bentley, a portfolio manager at Northward Capital.

Rio forecast continued recovery in prices, boosted by strong demand from China, which emerged in 2009 as the group's biggest single customer, accounting for a quarter of overall sales.

"We believe that the factors that drove price recovery in 2009 will continue through 2010," Chairman Jan du Plessis said.

Rio's ties with China, however, have been strained since Rio spurned Chinalco, and China detained four Rio staff last year, who were indicted on Wednesday for bribery and stealing commercial secrets.

Ahead of those indictments and tense annual iron ore price talks, Rio held out an olive branch last week, naming Mandarin speaker Ian Bauert to head its China business.

July-December underlying earnings fell to $3.733 billion from $4.829 billion a year earlier, compared with analysts' forecasts of $3.08 billion on Thomson Reuters I/B/E/S.

The result was bolstered by cost cuts of $2.6 billion, which Rio achieved a year ahead of target.

Annual earnings from its biggest division, iron ore, dropped 31 percent to $4.1 billion, hit by a drop in contract prices settled last year after demand slumped, but volumes were strong.

Aluminium profits returned to the black in the second half, with earnings of $111 million, but were in the red for the year. Copper profits rose 17 percent, skewed to the second half.

(Additional reporting by James Regan and Mark Bendeich in Sydney; Eric Onstad in London, Editing by Ian Geoghegan and Sharon Lindores)