Rio Tinto Stuck Between a Rock and a Hard Place With Too Much Cash
July 31 2019 - 1:11AM
Dow Jones News
By Rhiannon Hoyle
SYDNEY-- Rio Tinto PLC is preparing to share billions of dollars
in profits with its investors but is finding its options squeezed
by a decade-old restriction that limits how big a stake can be
owned by a Chinese investor.
Rio Tinto is forecast to return as much as $4 billion to
investors following its half-year result due Thursday, but the
miner risks upsetting its largest shareholder--and putting it in
potential conflict with Australia's antitrust regulator--if it
again opts to buy back shares in addition to paying a regular
dividend.
The issue is Rio Tinto's biggest investor--Aluminum Corp. of
China, known as Chinalco--is running up against a 15% ownership
ceiling imposed by Australian regulators in 2008 when cash-rich
Chinese companies were snapping up global resources assets. China
is the world's biggest buyer of iron ore, and Australian mines
owned by Rio Tinto and BHP Group Ltd. dominate global supply.
Rio Tinto's Chief Financial Officer, Jakob Stausholm, earlier
this year said the miner was mindful of the cap when deciding how
to return surplus cash, but it wouldn't dictate capital-management
plans.
Chinalco's shareholding in Rio Tinto's London-listed stock has
risen to 14.5% after the Anglo-Australian miner bought back almost
$10 billion in shares across the dual-listed group since the start
of 2017, including using cash from the sale of its coal mines.
Global miners have been lavishing investors with returns in
recent years after emerging from a market downturn, and investors
this year are expecting a fresh cash windfall from booming iron-ore
prices, which have surged to a more-than five-year high.
Companies buying back shares have been one of the biggest
sources of demand for equities on global exchanges in recent years.
In the U.S., companies listed on the S&P 500 index spent
roughly $800 billion last year alone on share repurchases--the most
ever in a single year. Companies and investors often applaud share
repurchases because they juice per-share earnings and can boost
stock prices.
Another buyback by Rio Tinto could push Chinalco's interest
above the 15% cap, which might force the Chinese group to sell
stock against its wishes, analysts say. Rio Tinto's management may
be deterred in doing a buyback by the 27% rise this year in its
London stock price, which has benefited from the surge in iron-ore
prices.
Rio Tinto declined to comment, as did a spokesman for
Australia's Treasurer, who oversees foreign investments in the
country. A spokesperson for Chinalco couldn't be reached for
comment.
Chinalco's stake in Rio Tinto is a legacy of one of the biggest
takeover tussles in the history of the global mining industry.
BHP's hostile bid for Rio Tinto about a decade ago threatened to
create a dominant force in the supply of iron ore, a vital
commodity for China's industrialization. While Chinalco's stake
purchase helped to scuttle BHP's bid, regulators worried the
Chinese group could gain too much influence over iron-ore pricing
and Rio Tinto's strategy if it wasn't kept in check.
Australia's treasurer at the time, Wayne Swan, said Chinalco
would need to seek permission to breach the 15% cap and its request
would be scrutinized on national-interest grounds.
At Rio Tinto's annual shareholder meeting in April, the Chinese
group voted against the miner repurchasing more shares. The
resolution still passed, however, with 79% of those who voted
supporting the plan.
Some analysts predict Rio Tinto will unveil a special dividend
on top of its promise to pay out 40%-60% of underlying earnings,
estimated at $5 billion in the six months through June.
"We think an increase to the buyback is unlikely with Chinalco's
stake approaching 15%," Glyn Lawcock, a Sydney-based resources
analyst at UBS Investment Bank.
Others are less sure. "My perspective is this is a Chinalco
problem, not a Rio Tinto problem," said Paul McTaggart, analyst at
Citi Research.
Rio Tinto's result likely will continue an upbeat tone for the
mining sector where profits are being supported by iron ore's rally
on industry-supply setbacks from Brazil to Australia, and booming
Chinese steel production. Anglo American PLC said last week it
would buy back $1 billion in stock and raised its interim dividend
by 27% as it reported a jump in half-year profits.
Miners including BHP and Glencore PLC are also expected to
report bumper profits, along with large capital returns, in
August.
Rob Taylor in Canberra contributed to this article.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
(END) Dow Jones Newswires
July 31, 2019 00:56 ET (04:56 GMT)
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