Global miner Rio Tinto surprised investors by more than doubling its full-year dividend and promising to return $5 billion to shareholders by 2012, looking to soak up bumper cashflows after it reported a record second-half profit.

After whittling down a $40 billion mountain of debt the company said it was in strong shape to take advantage of any other opportunities that might arise, even after returning all that cash to shareholders.

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 Tinto 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 said.

Rio Tinto said it would continue to focus on its expansion projects, after approving $12 billion worth of work in 2010.

Rio Tinto is reinvigorated, running strong and benefiting from favorable markets, Albanese said.

Rio Tinto 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.

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.

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.

Burned by its top-of-the-market takeover of Alcan in 2007, Rio Tinto has said it is only looking for acquisitions worth less than about $5 billion.

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.

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.

Its shares have jumped 29 percent over the past year, far outstripping an 8 percent gain in the broader market as commodity prices have taken off.

(Editing by Ed Davies)

India