Rio Tinto Plans to Spend $2 Billion in Share Buyback

As profits continue to soar for the world’s second-largest mining company, Rio Tinto announced it will return $2 billion to shareholders through a buyback.

The announcement comes six months after Walsh described the company as a “cash machine” following the company’s plan to cut costs and reduce debt.

“We’ve repositioned the business,” Chief Executive Officer Sam Walsh said in an interview with Bloomberg Television. “We are sitting here today with probably the strongest balance sheet of any of the major mining companies.”

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The proposed cash return to shareholders will embrace a targeted $387 million off-market buyback of Rio Tinto Ltd shares, and a $1.6 billion on-market buyback of Rio Tinto Plc shares.

“The business is certainly healthy, the results are good and they delivered on what they said they were going to do but the outlook for me is not healthy,” said Richard Knights, mining analyst at Liberum Capital Ltd.

Rio Tinto posted an underlying profit of $9.3 billion in 2014, down nine percent from the previous year. However, that still beat estimates from 26 analysts that forecasted the London-based company to average $8.97 billion.

“The low-hanging fruit has been picked in terms of spending, cost reductions and releasing working capital. It will get more difficult from here as we expect continued top-line pressure,” said Knights.

In November, Walsh reiterated the group’s promise to “materially increase” cash returns to shareholders “in a sustainable way”.  Rio’s promise of cash returns has been linked to its rebuffed $160 billion takeover approach from rival Glencore.

According to Business Review Australia, the buyback option for Rio Tinto will help further discourage Glencore’s attempt for a merger.

“Rio Tinto has made it clear that Glencore’s “merger of equal values” greatly undervalues the mining company. Rumours continue to pop up about the potential merger, however unlikely they may seem. It seems like for the time being, Rio’s cost-cutting plan is working for the mining giant just fine.” 

All in all, 2015 is going to be a tough year for the global mining industry.