The share price of Rio Tinto Limited (ASX: RIO) is in retreat even as our biggest iron ore producer took a step closer to selling its stake in the Indonesian Grasberg mine for an estimated sum of US$3.5 billion – or circa A$4.6 billion.
The news wasn’t enough to keep investors onside today as weaker commodity prices gave the market an excuse to sell mining stocks with Rio Tinto shedding 1.7% during lunch time trade while BHP Billiton Limited (ASX: BHP) lost 1.2% and South32 Ltd (ASX: S32) slipped 1.4%.
The market is also weaker in the early afternoon session with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) inching down 0.3% as bank stocks like Commonwealth Bank of Australia (ASX: CBA) saved the index from dropping deeper into the red.
But the pullback in Rio Tinto’s share price should excite value investors as the miner’s coffers are about to swell by a few more billions after the Australian Financial Review reported that the Indonesian buyer of Grasberg has secured financing to complete the deal.
I suspect we are only weeks away from Rio Tinto finalising the sale and revealing the price tag for the copper and gold mine. It is expected that this announcement will pave the way for management to announce further capital return initiatives given that the miner has far more cash in the kitty than is required for its operations.
Rio Tinto could announce a further share buyback but you can’t rule out a special dividend as well as that could be a less complicated way to unlock its bank of franking credits compared to an off-market share buyback. The miner has so far sold US$11 billion in assets over the past five years.
But it isn’t only the cash that should put a smile on shareholders’ faces. Indonesia is no easy place to do business given that the government has a track record of pushing foreign miners to seize majority control of mineral projects.
The country is definitely not the worst when it comes to sovereign risks, but I prefer the miners I invest in to have limited exposure to our next-door neighbour.
It also doesn’t help that Grasberg has a poor safety and environmental record with critics alleging that the mine dumps its wastes into local rivers, according to the AFR.
The Indonesian government is also pushing for more mineral processing to be done in the country to allow it to capture more value in the production process, and this push has sometimes put miners at loggerheads with the government.
But it’s not only Rio Tinto that is likely to announce new capital management initiatives later this year. BHP Billiton is also flushed with cash and the upcoming sale of its US onshore shale assets is only adding to expectations of a big cash handout.
It’s a brave board who would dare disappoint investors on this front.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 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.