An off-market buy-back on offer
Rio Tinto (ASX:RIO) is offering to its Australian and New Zealand registered shareholders the opportunity to participate in an off-market buy-back of shares. The offer comes following the sale of Rio Tinto’s remaining coal assets for US$3.96 billion. The company plans to purchase approximately 42.1 million shares through the off market buy-back, to return approximately US$1.9 billon to shareholders. Concurrently, the company has topped up its on-market purchase of Rio Tinto Plc shares by an additional US$1.0 billion.
The off-market price will consist of a A$9.44 capital component and the balance, to the final tender price, will be a fully franked dividend amount.
The buy-back price will be calculated by a predetermined formula through a tendering process. The tendering will require shareholders to offer stock to the company at a discount in the range of 8% and 14%, with 1% set incremental intervals between the minimum and maximum rate. Shareholders can tender one discount rate, multiple discount rates or accept the final tender discount rate. The discount rate tendered must fall into the prescribed range.
Turning to the daily chart, initial support at the 50-day moving average (red line) of $78.59, and trend-line support around $83.00 (dashed green line) have given way. The share price of Rio Tinto has dipped below the 200 day moving average (green line) but has reclaimed the 50 day (red line) moving average. A move back above the former level is needed to bolster the near-term outlook.
The final discount rate to be applied will be determined by the company after considering the discount levels tendered to complete the US$1.9 billion buy-back. The final discount rate will be within the prescribed range. At the company’s last off-market tender, which was offered in October 2017, the final discount rate applied was 14%.
The market price to which the final discount rate will be applied is the volume weighted average price of the company’s share price on the Australian Stock Exchange (ASX) over the five (5) trading days commencing 5 November 2018 and including the close date being 9 November 2018. The company will advise the ASX of the final tender price soon after the tender period closes. The final tender price will also be posted to the company’s website at www.riotinto.com.
To be eligible to participate in the off-market buy-back, Members must have held Rio Tinto Ltd shares on 26 September 2018.
Other conditions relating to eligibility to participate in the off-market buy-back are contained in the Off-Market buy-back tender booklet, that was forwarded to eligible shareholders on 4 October 2018. The tender lodgement period opened on 9 October 2018 and will close on 9 November 2018.
The company reserves the right to scale back applications in the event tenders exceed the US$1.9 billion buy-back amount. Where a scale back will create a small holding of 30 shares or less, the company will not apply the scale back.
We recommend eligible Members take no action at this stage regarding the off-market buy-back.
We will advise eligible Members of an appropriate course of action at a time closer to the close date of the tender period, being 9 November 2018.
The following table shows Members theoretical outcomes from participating in the off-market share buy-back across Australia’s current personal marginal tax rates (this table should not be viewed as providing taxation advice, its purpose is illustrative only, input data – Rio share price A$79.80, tender discount 14%, assumed cost base A$30, shares acquired at least 12 months prior, dividend 100% franked):
Source: Rio Tinto/Fat Prophets
Members can see from the above table, the higher the share buy-back tender discount applied by the company and the higher the personal taxation brackets, erode any benefit in participating in the off-market buy-back.
The taxation implications of the off-market buy-back will vary from Member to Member dependent on individual circumstances, which means Members outcomes could also vary considerably. Members should seek taxation advice regarding the implications of participating in the off-market buy-back.
A reduction in the company’s shares on issue will raise all the metrics reliant on using this number as the denominator in determining a value. Included are key metrics such as earnings per share, net asset backing per share and importantly the dividend amount per share and even ownership. In reducing the company’s number of shares on issue, this will, going forward, have a positive impact on all remaining shareholders.
We are fully supportive of both the off-market and the ongoing on-market buy-back programmes initiated by the company, as mechanisms to deliver value to its shareholders. We consider buy-backs as an appropriate long-term capital allocation tool, as the benefits (albeit very modestly initially) linger over a much longer time than a dividend or special dividend payout.
With reference to the monthly chart, resistance at the 61.8% Fibonacci retracement of $68.98 has been eclipsed. Prices are now flirting with the 78.6% Fibonacci retracement at $77.80 and a move above here would be positive. Moving forward, we would then expect prices to gravitate towards a band of resistance evident between $85.76 and $89.04. This is made up of the long-term 61.8% Fibonacci retracement (solid-red set of retracements) and the February 2011 resistance level respectively.
A definitive clearance of this price range would likely boost upward momentum and result in a gradual ascent towards the next resistance range sighted between $102.65 and $103.32. This consists of the long-term 78.6% Fibonacci retracement (solid-red set of retracements) and the 127.2% Fibonacci extension respectively.
Rio Tinto continues to maintain and in fact has improved the quality of its balance sheet, with its first half result for 2018 confirming the trend. This strength places the company in a very unique position financially to develop its pipeline of tier 1 assets and seek out value adding investments. The aim of the company’s development programme is to advance shareholder value across commodity cycles and over time. The company has added a further US$3.5 billion in cash to its coffers through the recent sale of its interest in the Grasberg mine.
Rio Tinto first half received a boost from firmer commodity prices on the back of what was a good operational result. The company continued to utilise its strong cash flow to sustain its robust balance sheet and support an expanded share buy-back programme. Rio Tinto may now, from a position of financial strength, use its ample cash flow to seek growth through both brown and greenfield opportunities. Rio Tinto’s stable of tier 1 assets, we believe, can advance shareholder value across all commodity price cycles.
Better commodity prices over the past 12 months has pushed Rio Tinto’s share price higher over the same time.Â
On the back of this share price action, we will continue to maintain our hold recommendation for Rio Tinto.
Disclosure: Rio Tinto is held within the Fat Prophets Concentrated Australian Share, UK Share and Global Mining managed account portfolios.
