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Rio Tinto coal exit could fund buyback

Rio Tinto shareholders could be in line for a windfall after the mining giant pocketed more than $4 billion in a week by selling its last remaining Australian coal assets.

Rio on Wednesday agreed to sell its 80 per cent stake in Queensland's Kestrel underground mine to private equity manager EMR Capital and Indonesian coal firm Adaro for $2.25 billion.

The move followed last week's $1.7 billion sale of two Queensland coal projects to Glencore and a $200 million stake in an undeveloped project to Whitehaven Coal.

With debt at a manageable level and capital expenditure unlikely to change, analysts expect a large part of the cash mountain to be carved up among shareholders.

UBS analyst Glyn Lawcock has tipped a buyback once the sales are completed in the second half of 2018, while RBC Capital Markets' Tyler Broda said buybacks and cash returns were both options.

"Management indicated with FY17 results that there is no need to further reduce net debt, mergers and aquisitions are too expensive, and capex will remain $5.5 billion to $6.0 billion until 2020," Mr Lawcock said in a research note.

"As a result, we expect proceeds (when received) to be returned to shareholders via an on- and off-market buybacks."

Rio Tinto last year used the proceeds from the sale of its Coal & Allied Industries operations in NSW to fund a $2.5 billion buyback.

Mr Broda said becoming the only major without coal assets was another positive and would help attract environmentally aware investors.

"The company has managed to reach a very flexible position," Mr Broda said.

"This could become even more important through a downturn should it be able to time a pivot back into asset purchases at the optimum time."

Rio Tinto chief executive Jean-Sebastien Jacques did not give specific details about where the funds raised would go, only that they would be used for "general corporate purposes".

"The sale of Kestrel, together with the announced divestments of Hail Creek and our undeveloped coal projects, delivers exceptional value to our shareholders and will leave our portfolio stronger and more focused on delivering the highest returns through targeted allocation of capital," Mr Jacques said.

"I would like to thank the many people at Rio Tinto and the communities where we operate, whose hard work and commitment has contributed to the success of the coal business over many years."

At 1506 AEDT, Rio Tinto's ASX-listed shares were down 0.8 per cent at $73.575 in a lower overall market.

The overall materials sector was about 1.1 per cent lower, with BHP Billiton, South32 and Fortescue Metals down by between 1.1 and 4.2 per cent respectively.

Austrlaian Associated PressBack to Breaking News

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