For the past two years, Rio Tinto (RIO) has set the benchmark for shareholder returns within the mining sector. With capital expenditure pared back, debts paid down and gross profit margins up, the commodities giant has directed ever-growing swathes of cash flow to investors. Juiced by the sale of its coal portfolio, and other disposals including its $3.5bn (£2.7bn) stake in the Grasberg copper mine, Rio declared cash returns of $9.7bn and $13.5bn in 2017 and 2018, respectively.
Within these returns, $7.2bn has been allocated for share buy backs, $6.1bn of which has already completed through a mixture of on- and off-market purchases of Rio stock. The remaining on-market purchases began in February, and should wrap up within 12 months.
Initially, a focus on buyback-charged returns over volume was probably welcome. But any debate over the programme’s merits has now been complicated by Rio’s largest shareholder, the Chinese state-owned aluminium giant Chinalco, which voted against a resolution allowing Rio directors to repurchase shares at this week’s annual general meeting.
Having not participated in the buyback programme to date, Chinalco stake in Rio’s London listed stock has risen to more than 14 per cent. But it was not alone in its dissent. The motion scraped through with just under 80 per cent approval, having passed with 98 per cent support at last year’s AGM.
Rio is likely to have seen this coming, as Chinalco is effectively barred under a deal with the Australian government from owning more than 14.99 per cent of Rio stock. This agreement dates back to Chinalco’s original investment in 2008, when the Chinese group helped to scupper a bid for Rio from iron ore rival BHP (BHP).
The relationship has been fractious ever since. In 2009, Chinalco failed in its bid to invest a further $19.5bn in Rio, following backlash from Australian authorities. Later that year, four Rio employees were arrested and eventually jailed after a Shanghai court convicted them of commercial espionage and accepting bribes. Throughout, Rio’s profitability has remained heavily reliant on Chinese economic growth.
At an analyst roundtable in February, Canaccord Genuity analysts Andrew Keen and Des Kilalea reported that “the ceiling to the Chinalco stake [was] mentioned as a constraint” when senior management were questioned on the group’s decision to pay a $4bn special dividend.
