An extended decline in iron ore, down 30 percent this year to near a two-year low, may limit the scope of potential share buybacks by the world’s biggest mining companies BHP Billiton Ltd. and Rio Tinto Group.
“The most pertinent question is whether Rio will be bold enough to proceed with a much mooted share buyback in early 2015 if iron ore ends 2…
An extended decline in iron ore, down 30 percent this year to near a two-year low, may limit the scope of potential share buybacks by the world’s biggest mining companies BHP Billiton Ltd. and Rio Tinto Group.
“The most pertinent question is whether Rio will be bold enough to proceed with a much mooted share buyback in early 2015 if iron ore ends 2014 on a weak note,” Macquarie analyst Jeff Largey wrote in a report yesterday. The bank estimates BHP could buy back 5 percent of its market value and Rio 10 percent, about $19 billion of shares at today’s prices.
Waning Chinese demand coupled with an expanding worldwide glut of the steel-making material saw iron ore decline to $89 a metric ton on June 16, the lowest since September 2012. Analysts widely expect London-based Rio to bolster its cash return beyond its dividend when reporting earnings in February. BHP Billiton, the world’s biggest mining company, has also been forecast to return cash to investors as early as August.
“We question whether Rio may look to limit the scope of a potential buyback,” Largey said. “A weaker than expected iron ore price and a share buyback may limit future funding flexibility.”
Rio Chief Executive Officer Sam Walsh said in a December interview that the company’s drive to strip out more than $2.3 billion of costs since the start of 2013 would provide the board with options to return cash to investors. The board will decide on the size of any possible return prior to its full-year earnings announcement in February, he said.
$100 average
Rio Tinto’s London-based spokesman Illtud Harri and London- based BHP spokesman Ruban Yogarajah both declined to comment.
If the price of iron ore averages below $100 a ton this year BHP and Rio “may struggle to justify a share buyback program and expect to meet credit metrics,” Largey said. Still, if the price rebounds toward the bank’s second-half estimated average of $108 a ton, a buyback could be justified, he said.
Iron ore with 62 percent content delivered to Tianjin port in China, a benchmark, rose 0.4 percent to $93.70 a dry ton today, according to The Steel Index Ltd.
Rio slid 0.9 percent to 3,069 pence by 1:58 pm. in London, valuing it at about $98 billion. BHP fell 1.4 percent to 1,895.5 pence at the same time, valuing it at about $177 billion.
Rio has said its focus this year is to cut debt from $18.1 billion at the end of last year.
It may buy back $3 billion to $5 billion of shares next year, Jefferies LLC analyst Chris LaFemina estimated after Rio reported $10.2 billion of underlying 2013 profit in February.
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