Rio Tinto surprised investors by more than doubling its full-year dividend and promising to return $5 billion to shareholders over the next two years to soak up bumper cashflows after it reported a record second-half profit.

The size of the buyback and the target for completing it by 2012 was not good enough for some investors, who were hoping for more cash up front and sent Rio's shares 1 percent lower in early London trade.

The fact that (the buyback's) long-dated might disappoint some investors, said Lyndon Fagan, resources analyst at RBS in Sydney.

After whittling down a $40 billion mountain of debt the no.3 global miner by market value said it was in strong shape to take advantage of any other opportunities that might arise, even after returning cash to shareholders.

Burned by its top-of-the-market takeover of Alcan in 2007, Rio has said it is only looking for acquisitions worth less than about $5 billion. Investors were upbeat on the results, which were in line with forecasts.

I was pleasantly surprised by the share buyback. It was definitely in the top end of what I thought they would do. It was a good result, said Brendan James, portfolio manager at Perennial Growth.

Rio's move will raise expectations that top global miner BHP Billiton, with its nearly debt free balance sheet, will step up its dividend payout and add to its ongoing $4.2 billion share buyback when it reports results on February 16.

Smaller rival Xstrata set the pace earlier this week topping forecasts with an 86 percent jump in full-year profit and a dividend that was nearly double market expectations.

Rio and its peers are all flush with cash, producing at full steam with copper prices at record highs, spot iron ore prices up nearly 50 percent from a year ago, and thermal coal prices up nearly 40 percent.

Chief Executive Tom Albanese said economic growth in emerging markets combined with supply constraints meant the market and pricing outlook for commodities remained positive, but warned that the risks were elevated.

In particular, the timing and speed at which post-global financial crisis stimulus packages are removed have the potential to generate both volatility and substantial swings in commodity prices, he told reporters.

Rio plans to further invest in its expansion projects, after approving $12 billion worth of work in 2010. Our business is back doing what it does best and performing exceedingly well, Albanese said.

Underlying earnings before one-offs rose to $8.22 billion for the six months to December, based on Reuters calculations, from $3.73 billion a year earlier and against analysts' forecasts of around $8.29 billion.

The company stepped up its dividend to 108 cents a share for the year, up from 45 cents a share a year ago. Analysts had said anything more than 100 cents a share would be a big surprise.

That by itself reflects the confidence that we've got going forward that we can maintain that dividend, because it's a progressive dividend, Rio's Chief Financial Officer Guy Elliott told reporters.

RIVERSDALE STALEMATE

Two key headwinds face the miners, a slow recovery of Australian coal production, after devastating floods shut mines and knocked out export rail lines in Queensland, and rising operating and project costs as labor and energy prices rocket.

But soaring coal prices are expected to more than offset the impact of lower production.

Albanese played down the threat of labor shortages, saying Rio had a good track record of completing projects ahead of time and on budget.

It is chasing Mozambique-focused coal miner Riversdale Mining with a $3.9 billion bid, and extended the offer to March 4 on Thursday as it has yet to win support from Riversdale's two biggest shareholders, India's Tata Steel and Brazil's CSN.

It is under pressure to possibly raise its offer after CSN increased its stake this week to 19.9 percent, just below the threshold for making a full takeover offer.

CSN has not said what its intentions are and Albanese declined to comment on any talks with CSN or Riversdale's top shareholder, Tata Steel. The Indian firm has said it intends to retain its strategic stake, at least for now.

Riversdale shares rose 0.6 percent to A$15.95, but remained below Rio's A$16 a share offer, indicating shareholders are not expecting a higher bid to emerge, with Rio Tinto potentially ending up with just over 50 percent control to seal the deal.

It's quite likely Tata and CSN will both stay and keep their exposure to coking coal. Rio should be able to go to 50 percent even without them, said Rakesh Arora, sector analyst at Macquarie Research in Mumbai.

(Editing by Ed Davies and Anshuman Daga)

India