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Blog

Rio Tinto moving closer to Coal & Allied sale

Adrian Prendergast

RIO has confirmed that it prefers Yancoal's bid for its Coal & Allied assets of US$2.45bn, over Glencore's higher offer of US$2.55bn.

Initial impression

The extra cash on the balance sheet will see RIO have more than enough spare capital to increase its ordinary dividend, and still potentially pursue a share buyback and/or a special dividend at its interim result in August.

Highlights

  • Spare capital. We forecast CY17 FCF of ~US$7.5bn for RIO, with the Coal & Allied sale likely to take that to c.US$10bn. We are already forecasting RIO will boost its ordinary dividend to US$5.1bn for CY17. This could leave RIO with a spare c.US$5bn of cash flow this year if the CNA sale is finalised, which could be used for either a special dividend and/or a buyback.
  • Extra capital management likely. With limited capex commitments, and what we see as generally low business confidence across the sector, we expect RIO will continue to focus on boosting returns for shareholders in its upcoming August result.
  • This week Yancoal revised its offer for RIO's Coal & Allied assets by bringing forward US$500m in deferred payments to the time of deal completion. Yancoal also confirmed that RIO shareholder meetings are planned for 27 and 29 June. 

Our view

Current commodity price turbulence will see RIO's share price come under further selling pressure this week. This could yield an opportunity to add to positions at attractive levels in the big miner. 

Our preference between the two big Aussie miners has moved from neutral back to BHP, after its recent underperformance. Although we do maintain an Add rating on both miners.

More information

Morgans clients can view further detailed analysis on Rio Tinto (RIO) via the company profile page. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.