Rio Tinto under pressure to ditch its dual listing
UK hedge fund Palliser Capital says there is a compelling case for Rio to become a sole-listed and Australian-domiciled company.
Rio Tinto is under pressure to ditch its dual listing on the London stock exchange and the ASX after an activist hedge accused the company of value destruction, in a move which coincided with the mining giant’s investor seminar in London.
Palliser Capital said there was a compelling case for Rio to become a single Australian domiciled holding company, and has put its case in a letter and presentation to the Rio board.
In calling for change, Palliser said the dual listing structure had led to about $US50bn in value destruction for shareholders since its inception.
Palliser’s chief investment officer is James Smith, who previously worked for Elliott Management, the hedge fund which agitated for dual listing change at BHP.
Palliser said the Rio structure had limited its ability to pursue stock-based M&A and led to inefficient utilisation of Australian franking credits.
The hedge fund rejected arguments made by Rio management against unification, noting the successful example set by BHP, and pointing to a “glaring $US24bn structural value gap” between the PLC shares listed in the UK and the Ltd shares listed in Australia.
The dual listing has been in the spotlight since BHP’s all-scrip bid for Anglo American in April raised questions about Rio’s capacity to counter. And, the ASX-listed shares have traded at a 25 per cent-plus premium to the PLC at times this year, the widest gap in more than a decade.
In responding to questions on the dual listing in August, Rio chief financial officer Peter Cunningham said the tax costs would be in the mid single-digit billions of dollars based on independent accounting advice.
Mr Cunningham also referred to the high number of PLC investors who would need to come through a unification, pointing out shareholders based in Australia would be enjoying the franking benefits which underpinned a premium in the market.
Pallister called for the Rio board to launch an independent review of the merits of unification and to publish a detailed report on the findings for shareholders to consider.
“So compelling is the case for unification that every other large cap public company with a dual listing structure has already successfully unwound it with overwhelming support from their directors and shareholders alike,” Pallister said.
“This includes the highly comparable case of BHP, whose structural unwind was recommended by every single one of its directors and approved by 97 per cent of its shareholders.”
The Pallister push came as Rio doubled down on its big bets on copper and lithium in unveiling growth targets for the next decade.
The mining giant flagged the building out of lithium projects in South America and Canada, acquired through the $10bn takeover of Arcadium Lithium despite a price fall which has seen a string of Australian mines shut down.
Rio is also banking on its high grade Simandou iron ore project in Guinea for growth amid a review of the product strategy for its cash cow iron ore mines in WA, where the company has complained of approval delays.
The Jakob Stausholm-led Rio expects a big boost in copper production from its Oyu Tolgoi mine in Mongolia next year as Simandou moves closer to churning out iron ore for the Chinese market.
Mr Stausholm said the company, which is trying to diversify a portfolio still heavily reliant on iron ore, expected a compound annual growth rate of about 3 per cent out to 2033.
“As we ramp up the Oyu Tolgoi underground copper mine, deliver the Simandou high-grade iron ore project in Guinea, and build out our lithium business through the proposed acquisition of Arcadium, we are underwriting a decade of profitable growth,” he said.
“We plan to utilise our strong balance sheet to accelerate Arcadium’s tier one projects, timed to meet future demand growth.”
Analysts at Barclays rate Rio the best of seven major diversified miners in terms of growth prospects to the end of the decade.
Rio’s leap into lithium broke new ground for the world’s diversified miners, with BHP and Glencore among those unconvinced about the merits of investing in the battery-making ingredient.
The Arcadium deal gave it control of about 5 per cent of the world’s lithium supply, mainly through operations in the Argentinian Andes, as well as options in South America and Canada.
Rio’s previous exposure included the Rincon project in Argentina, which produced first lithium last week, and the stalled Jadar project in Serbia. The breakthrough at Rincon set the scene for Rio to make a final investment decision on boosting production to 60,000 tonnes per year.
Rio’s plans to boost production could spell more trouble for the likes of Chris Ellison’s Mineral Resources, Pilbara Minerals, Gina Rinehart-backed Liontown Resources and other lithium dependent stocks on the ASX.
UBS last week lifted its 2025-26 price estimates for the lithium spodumene produced by WA miners to $US800-$US850 per tonne. The price has improved from about $US750 per tonne in the past few weeks, but is way down on the highs of $US8000 per tonne seen in early 2023.
In copper, Rio is targeting annual production of 1 million tonnes by the end of the 2020s underpinned by Oyu Tolgoi, where production is expected to increase more than 50 per cent next year.
Rio is aiming to have a new copper-gold mine in WA in production around the end of the decade after striking a deal with Sumitomo on development of the Winu deposit in the Great Sandy Desert.
The $34bn Simandou project in Guinea — owned by Rio and Chinese steelmakers — is expected to be in production late in 2025.
Rio noted significant progress in construction of mine, port and rail infrastructure at Simandou and said it was on track to be producing 90 million tonnes per year by 2028.
The WA iron ore operations provided $US5.2bn of Rio’s underlying earnings of $US5.8bn in the six months to June 30 and remain integral to the company’s fortunes through a challenging mine transition period.
Rio forecast WA iron ore shipments of 323-338 tonnes in 2024 and gave the same guidance for next year as it grapples with declining grades from some of its ageing mines.
Copper production is expected to increase from 660,000-720,000 tonnes to 780,000-850,000 tonnes. Rio also forecast a slight increase in production from its improving aluminium business.
Rio forecast capital expenditure of $US9.5bn in 2024, followed by $$US11bn in 2025 and $US10bn-$US11bn a year across the mid-term.
Speaking ahead of an investor seminar in London, Mr Stausholm said Rio was executing its strategy of delivering a stronger, more diversified business underpinned by faith in demand for materials needed in a global energy transition.
“With improved performance we can afford both growth and our decarbonisation, and continue our dividend policy and practice while preserving a strong balance sheet,” he said.
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