Why Rio Tinto Limited (ASX:RIO) could have an extra $4.6bn to splash on shareholders

News that Rio Tinto Limited (ASX: RIO) is negotiating the sale of its stake in the Grasberg copper mine is fuelling hope that the mining giant will join BHP Billiton Limited (ASX: BHP) in returning billions to shareholders later this year.

Shares in Rio Tinto are bucking the market downtrend this afternoon with a 0.1% gain to $84.72, when the  S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has dropped by an equal amount into the red.

The iron ore major confessed to the stock exchange that it is in the midst of a negotiation to sell its entire interest in Grasberg to its Indonesian joint-venture partner, after reports emerged that Rio Tinto could flog off its stake for US$3.5 billion ($4.6 billion).

Management stressed that it’s early days yet and there’s no guarantee if a deal can be reached or how much Rio Tinto can get for its investment in the Indonesian mine, which also counts US mining heavyweight Freeport-McMoRan Inc as the third JV partner.

The Indonesian government has made it known that it wants to control at least 51% of the mine and the Australian Financial Review notes that the negotiations could see Rio Tinto sell its right to 40% of Grasberg to the country’s state-owned JV partner PT Indonesia Asahan Aluminium.

It’s also understood that the Indonesian government would like the deal stitched up by June, so investors may not need to wait long to hear more about the divestment, which will leave Rio Tinto in an enviable position to undertake further capital management initiatives in the second half of 2018.

The miner has managed to sell a number of assets including its stake in the Kestrel coal mine two months ago for a better-than-expected price of US$2.25 billion.

BHP is also in the midst of a large asset divestment program. It is looking to offload its US onshore shale oil and gas assets in a deal that could add US$10 billion to its coffers.

Given the bullish outlook for the oil price that has prompted analysts to upgrade their near-term oil price forecasts, and the strong corporate interest in the sector that has put Santos Ltd (ASX: STO) in the M&A spotlight, BHP could receive a higher-than-expected offer for these assets with any potential deal likely to be announced after June this year.

The market is counting on BHP (and now Rio Tinto too) to undertake more share buybacks or other capital return initiatives given that the proceeds from the asset divestments will be surplus to their needs thanks to strong commodity prices.

There has been some debate on whether investors should take profit on the outperforming miners. I think longer-term investors would be doing a disservice to themselves if they cashed out now as I can’t think of a better time to stay overweight on the big miners with their robust operating outlook, the prospect of capital returns and the small but growing threat of stagflation (click here to find out why you should be worried about this risk).

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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