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Why Rio Tinto Limited (ASX:RIO) may lag BHP Billiton Limited (ASX:BHP) despite its $4.9b payday

Our largest iron ore miner signed a binding agreement to sell its stake in the Grasberg mine in Indonesia for US$3.5 billion ($4.9 billion) but the news could disappoint investors.

Rio Tinto Limited (ASX: RIO) said that the proceeds of the sale, which it expects to be received in the first half of 2019, will not be handed back to shareholders but will be retained for “general corporate purposes”.

Its share price may fall on the news as investors have grown accustomed to blue-chip stocks returning capital to shareholders from any asset sale and there’s certainly some market expectation that Grasberg will be no different.

This is despite the fact that Rio Tinto announced a week and a half ago that it was undertaking a US$3.2 billion share buyback that’s funded from the sale of its coal assets.

Investors will have to wonder if today’s announcement marks the end of the austerity drive that aims to increase short-term shareholder returns; and if so, is Rio Tinto about to start on a new phase of a stingier version of fiscal conservatism or an aggressive expansion phase – something the big miners have gone out of their way to avoid over the past year or three, in a move that ensured their share prices outperformed the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.

I suspect this will be the question analysts will be asking over the coming period.

The fact is, Rio Tinto doesn’t need the cash from the Grasberg sale. Iron ore prices are holding up very well and the miner can generate more than enough cash to keep it going even if the price of the commodity falls.

It looks to me that Rio Tinto may be buying itself some optionality. If the iron ore price remains well supported as many are predicting, thanks to an infrastructure building boom in China and around the world, we could see the miner use the billions for greenfield expansion or acquisitions.

That would truly mark a sharp change in direction for Rio Tinto and could prompt its peer BHP Billiton Limited (ASX: BHP) and maybe even Fortescue Metals Group Limited (ASX: FMG) to follow.

However, what this could mean in the nearer-term is that BHP will have a greater opportunity to outperform Rio Tinto.

As it stands, there are more short-term catalysts for BHP’s share price as it’s probably close to announcing a multi-billion dollar share buyback.

Rio Tinto’s signal that it’s turning off the spigot on any future big capital returns will give investors more reason to favour one over the other.

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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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