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Rio Tinto shares gain as Barclays and UBS welcome shareholder cash returns

Published: 08:38 22 May 2017 EDT

Rio Tinto
Rio Tinto's CEO says the miner is ready to take advantage of any opportunities that arise

Rio Tinto (LON:RIO) shares gained as Barclays and UBS analysts welcomed the miner’s plans to return US$2.7bn in cash to shareholders this year.

Shares rose 1.45% to 3,213.50p.

The company’s chief executive, Jean Sebastien Jacques, told the Bank of America Merrill Lynch global metals and mining conference in Barcelona last week that Rio would match’s last year’s cash return to shareholders in 2017 even if iron ore price fell to near record lows of US$42 per tonne.

“Our stronger financial position allows us to maintain a balanced allocation between capital expenditure, debt reduction and shareholder return,” Jacques said.

Rio has recovered an average price of US$74 per tonne so far this year for iron ore, 38% higher than the average price in 2016. Last year's cash return was achieved at an average iron ore price of US$53.60

Iron ore generates more than two-thirds of Rio’s revenue.

 

Rio Tinto's investment case looks compelling, says Barclays...

Barclays said Rio’s investment case “continues to look compelling, with a spot free cash flow (FCF) yield of 12%, 2.5 times higher than the 2012-15 bear market average of 5%.

“To get to 5% FCF yield we would need to assume commodity prices return to first quarter 2016 bear market lows into perpetuity (US$45 per tonne of iron ore, US$2 per pound of copper and US$0.70 per pound of aluminium)," the bank said.

“Meanwhile capital expenditure is unlikely to increase before 2019, probability of merger and acquisitions is low, and all surplus cash will be returned to shareholders.”

Barclays repeated an ‘overweight’ rating on the shares and a target price of 4,300p. 

 

UBS expects higher returns from Rio Tinto...

USB said based on the group’s latest update, it remains confident that Rio will lift returns in fiscal year 2017/18. The bank highlighted Rio’s aim to grow cash flow and profitability, reiterating a ‘buy’ rating and target price of 3,750p.

“We expect the stock to re-rate over the next 12 months when Rio steps up returns to shareholders, and as volatility in commodities/mining stocks moderates,” UBS said.

Jacques said that Rio account for half of the total cash returns of the FTSE All Share mining index last year.

Many of the group’s rivals were unable to return cash to shareholders last year as they were trying to cut debt and bolster their balance sheets. Rival BHP Billton has come under pressure from activist investor Elliott Associates to boost shareholder returns. 

Jacques hinted at potential acquisitions, saying Rio's strong balance sheet meant it was "ready to take advantage of any opportunities, should they arise". "But let me be clear, any transaction must create value for our shareholders. And our threshold is very high," he said.

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