UBS: RIO: Share Buyback Programme

Submitted by Craig Strzelecki on 21 December, 2005 - 09:34

Event: Rio announces share repurchase programme

Rio has announced that it has commenced a programme to buy back shares during the period which commences on 20 December 2005 and ends on the announcement of Rio’s results on 2 Feb 06. The buy back programme will be managed by an independent third party, which makes its trading decisions in relation to Rio Tinto’s securities independently of, and uninfluenced by, Rio Tinto.

Impact: Enables Buy Back to continue through black out

Traditionally Rio has suspended its Buy Back programme during blackout periods around its results (end of reporting period until results release). Today's announcement provides Rio with the ability to continue its US$1.5bn buy back programme without conflict.

Action: Buy 2 (RRD). Rio committed to returning capital

We expect Rio to look to increase its US$1.5bn capital return program in Feb 06 or perhaps even look to a special dividend as off market buyback in Ltd stock while EPS accretive, does reduce Ltd holding in the DLC and reduce liquidity. Rio has surplus franking credits which it would like to return to shareholders.

Valuation: A$51.21 (DCF, 10% d.r)

We have a Buy 2 (RRD) rating and $75 price target based on 12x CY 2006e earnings. We continue to favour RIO over BHP among the diversified miners, with RIO's greater leverage to iron ore the key reason behind our preference for Rio Tinto over BHP.