Why did shares of major miner Rio Tinto Group (RIO) jump by better than 4% today?
First, the company bought back some $1.7 billion of its corporate bonds maturing in 2018 in an effort to cut the company’s debt load. Initial estimates are that the company could reduce its outstanding debt by $.45 billion and improve its EBITDA-to-debt ratio by better than 10%. (EBITDA is shorthand for earnings before interest, taxes, debt, and amortization.)
Second, there are rumors swirling that Rio is planning on expanding its stake in Turquoise Hill Resources (TRQ), which operates a copper and gold mine in Mongolia.
This is already the second time that Rio Tinto has engaged in a bond buyback this year. During April and May, it spent $1.5 billion on such repurchases, paying a premium over their face value. It may follow this up with even more buybacks before the year is over as it faces heavy debt in the wake of the fall in commodity prices over the last three years. Commodities have rebounded some 13% so far this year, however.
According to the Financial Review, “The miner froze salaries and reduced travel costs in January and announced plans the following month to cut its dividend.” Rio is not the only company to follow this path: Anglo American (AAL) similarly spent $1.7 billion buying back its euro-, pound-, and dollar-denominated debt this year.
By the late afternoon, shares of RIO were over 4.25% higher.
Rio Tinto and Turquoise Hill
Rio holds a 51% stake in Turquoise Hill, which in turn owns two-thirds of the Oyu Tolgoi copper-gold mine in a partnership with the Mongolian government. There have long been reports that Rio was planning on increasing its investment in the mine, but issues with the government and resistance to potential Chinese investors had stalled any plans.
Now, however, it seems that Turquoise Hill and Rio have gotten the go-ahead to develop the $5.3-billion mining project. Once the open-pit Oyu Tolgoi project is developed into a full-scale underground mine, it is estimated that it will produce some 500,000 metric tonnes of copper annually—which would account for an impressive 30% of Mongolia’s gross domestic product (GDP).
At the moment, Turquoise Hill is valued at over $8 billion. Rio Tinto has maintained a majority stake in the company since 2012, but the news stories hinting that Rio may expand its interest have been consistent over the past several years. Sasha Bukacheva, an analyst at BMO Capital Markets, points out, “It’s a recurring headline.”
With depressed copper prices, another possible selling point is that Oyu Tolgoi was “one of the few copper miners that reported strong earnings and maintained a healthy balance sheet.” Last year, TRQ boasted over $650 million in operating cash flow. The company’s shares were also almost 2% higher during trading on Wednesday.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.