The Rio Tinto Ltd (ASX: RIO) share price is in danger of losing value if a shareholder proposal is carried around, according to the ASX mining share.
Currently, Rio Tinto is split into two companies – one is listed on the ASX and one in the UK. An institutional shareholder called Palliser Capital is urging Rio Tinto to consider whether a unification of the dual-listed companies (DLC) structure into an Australian-domiciled company would be in the best interests of shareholders.
Palliser wants Rio Tinto to form a committee of independent directors to review the idea, commission an independent expert report on this matter, and publish a detailed report of the committee's findings.
It has been suggested that US$50 billion of value has been eroded due to the miner's DLC structure. It wasn't long ago that BHP Group Ltd (ASX: BHP) unified its structure to Australia to improve its efficiencies, structure, and costs.
In an announcement to the ASX and London Stock Exchange, Rio Tinto's board revealed why it's unanimously recommending shareholders vote against the resolution.
Miner defends its corporate structure
The ASX mining share noted it has already reviewed a unification of the DLC with five leading external advisers, "the conclusions of which were clear". It said it has already published those conclusions, and disclosure of further analysis in "key commercially sensitive areas would be prejudicial to shareholders' interests". Plus, another review would be "wholly duplicative".
Rio Tinto said it has "engaged extensively" with Palliser Capital and other shareholders but noted that assertions about US$50 billion of value erosion due to the company's DLC are "both unfounded and misleading". On the contrary, the mining business believes unifying the DLC structure would be value-destructive for the group and Rio Tinto shares.
The reasons for unifying other companies, such as BHP, don't apply to Rio Tinto for multiple reasons. That includes the location, growth outlook, and tax profile of the group's assets. Rio Tinto also noted there is a difference in the scale of the entity that is to be absorbed in a possible unification.
The board also pointed out that a unification is not required to provide strategic flexibility.
Both the UK and Australian businesses will hold their annual general meetings (AGMs) in the coming weeks. They are scheduled for 3 April 2025 and 1 May 2025.
Why would this be value-destructive for Rio Tinto shares?
Rio Tinto outlined why it concluded that billions of dollars of value would be potentially destroyed by a unification. The miner's board said:
The detailed tax analysis by EY concluded that a DLC unification would result in expected tax costs in mid-single digit US$ billions, and would therefore reduce net asset value. Further, a DLC unification is expected to result in significant "wastage" of franking credits in the future given the >3x increase in franked dividends paid to Rio Tinto shareholders, a large portion of whom would not be expected to benefit from them as they would not be tax-resident in Australia. This would likely leave Rio Tinto unable to pay fully franked dividends in the longer term, which could adversely impact on the individual tax position of Australian shareholders and on the Rio Tinto share price in due course.
The economic justification for a DLC unification would, therefore, need to rely heavily on Palliser Capital's flawed and unsubstantiated claim that the share price of a unified Rio Tinto would trade up to, and ultimately surpass, the current price of Rio Tinto Limited, despite the valuation headwinds described above, which implies that the DLC unification would need to add c.US$20 billion of value to the Group's market capitalisation.
This would require shareholders to fundamentally reassess how they value Rio Tinto today and/or require incremental demand of tens of billions of US dollars from Australian tax-resident investors that can benefit from (and value) franking credits. This far exceeds aggregate volumes of equity issuance across the entire Australian equity market each year and is many multiples of any equity raise ever previously completed on the ASX.
Rio Tinto share price snapshot
The ASX mining share is trading at virtually the same price as it was a year ago – it's down less than 1%.
