Investors put pressure on Rio Tinto to distribute excess capital

Rio Tinto is under pressure to deliver on the CEO’s promise to become a "cash machine" for investors as it justifies snubbing a merger approach from Glencore.

With Glencore effectively barred from making a renewed bid until April, Rio has a window to woo shareholders through stock buybacks and selling non-core assets. In August, CEO Sam Walsh said his $3.2bn cost-cutting drive increased the options for distributing excess capital.

Now, with Glencore CEO Ivan Glasenberg hovering, investors said it was time for Rio to act on Walsh’s words. He will update shareholders on the company’s strategy at seminars in Sydney on November 28 and London on December 4.

Rio will then post full-year results in February when analysts said it was likely to announce the first buyback since 2012.

The possibility of a hostile offer next year would compel Rio to shore up investor support, said Baring Asset Management investment manager in global resources, Clive Burstow. "If Rio doesn’t deliver a buyback that the market is happy with, investors will say ‘why should we continue to back you as the management team?’" said Mr Burstow, who counts Rio as a top 10 holding.

Mr Walsh has cut costs and slashed debt incurred when Rio paid $38bn for Alcan seven years ago. The company has a checkered history of acquisitions, with more than half the value of the Alcan deal written off and a $3bn write-down in 2013 on a Mozambique coal deal.

Those failures led previous CEO Tom Albanese to quit and will probably deter London-based Rio from making another deal, even if it were to serve as a defensive move against Glencore, according to Citigroup.

"Rio is unlikely to swallow a poison pill and make an acquisition after their experience with Alcan," Citigroup analysts led by Clarke Wilkins wrote in a report last month. "The most likely outcome is for the company to gear up and buy back stock and spin off noncore assets, such as Alcan."

Spokesmen for Rio and Glencore declined to comment.

Rio slipped 0.3% to A$60.16 in Sydney trading on Wednesday where it has risen 4.5% since October 6, the day before it revealed Glencore’s July approach. Glencore declined 8.5% in London over the same period. Reviving previously scrapped or stalled asset sales may provide additional cash to appease investors. In August last year, Rio deferred a 2011 plan to divest Australian and New Zealand assets known collectively as Pacific Aluminium as it did not get the price it wanted.

Two months earlier, Rio said it would keep its diamond business after failing to find a buyer and deciding not to pursue an initial public offering. Rio was also seeking to sell its Canadian iron-ore operations, a person close to the matter said in March.

In rejecting Mr Glasenberg’s July offer, Rio chairman Jan du Plessis said the company was better off sticking with its strategy of reducing costs and returning cash. It was also committed to cutting net debt to the mid-teens, a target it reached at the end of the first half when borrowing was lowered to $16.1bn.

Mr Jefferies has predicted Rio will announce a buyback of $3bn to $5bn next year.