Rio Tinto Stuck Between a Rock and a Hard Place With Too Much Cash

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 [e-mail]

(END) Dow Jones Newswires

July 31, 2019 00:56 ET (04:56 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.