Shares in Rio Tinto surged from the opening bell Wednesday with sentiment cheered by the sale of a further suite of coal mines which raises the odds of a buy-back or dividend hike.
In opening trading, the shares were up 2.3 per cent at $66.28, their highest level in around two years. This followed a 4 per cent surge in overnight trading in London.
![Yancoal is buying Rio's NSW coal mines.](/web/20170125114706im_/http://www.smh.com.au/content/dam/images/g/t/y/0/5/q/image.related.articleLeadwide.620x349.gty5dr.png/1485302638167.jpg)
Last night, Rio announced the sale of its NSW coal mines to an arm of the Chinese government, Yancoal Australia for $US2.45 billion ($3.2 billion), subject to government approvals.
Since Rio released strong December quarter production data earlier this month, analysts have been pencilling in forecasts of a share buy-back or dividend hike to be unveiled when the miner releases its December half earnings on February 8, with the sale overnight boosting their optimism that there will be more good news for shareholders over the course of the year ahead.
The sale of the mines to Yancoal is not expected to be finalised until much later in 2017, with Yancoal to turn to equity markets to raise funds. Its majority shareholder, the Hong Kong-based Yanzhou Coal, has signalled it will invest a further $US1 billion in expanding the equity base of Yancoal. It has a 78 per cent shareholding in Yancoal.
The Chinese controlled company has won control of six mines in NSW, mostly producing thermal coal which is primarily used to produce electricity.
"The sale marks the end of Rio Tinto's gradual exit from thermal coal, commencing in 2009 with the Cloud Peak spinoff in the (US) Powder River Basin, and subsequent divestments of Clermont, Bengalla, and Mount Pleasant," Deutsche Bank said in a note to clients.
"We estimate that proceeds from the sale could help reduce the company's net debt to US$3.9 billion by the end of 2017, further strengthening the balance sheet position, underpinning capital returns, and lending flexibility to the company's approach with growth projects in the key divisions of iron ore, copper and aluminium - Koodaideri, Oyu Tolgoi and Amrun."
Analysts have been steadily raising their share price forecasts for Rio shares on the flow of good news, with Macquarie, for example, now tipping the shares will reach $74 over the year ahead.
"We expected Rio to kick in a $3 billion of capital management program with full year results on February 8," Citi analysts told clients. "This sale likely opens up increased opportunity of potential shareholder returns."