uploads///Capex

Can Rio Tinto’s Capital Allocation See It through Volatile Times?

By

Updated

Capital allocation

Decisions regarding capital allocation are key for companies to maintain an appropriate balance between returns to shareholders and investment in business.

Article continues below advertisement

Capex cuts

Rio Tinto has reduced its capex (capital expenditure) guidance for 2016 and 2017 by a total of $3 billion. The company now expects its capex to be $4 billion in 2016, $5 billion in 2017, and $5.5 billion in 2018. This guidance includes sustaining capex of $2 billion for each of these years. The reduction in capex mainly follows from the following factors:

  • benefits from favorable currency movements and lower input costs
  • detailed reviews of major project budgets in terms of both project planning and phasing of expenditures

However, investors should note that Rio Tinto just got permission for underground development at the Oyu Tolgoi mine in May. While Rio Tinto had capex for Oyu Tolgoi in its forward guidance, there could be an upside to the guidance due to actual capex.

Dividend policy change

Rio Tinto (RIO) has created a new dividend policy to replace its previous progressive dividend policy in 2016. According to this new policy, the board will decide on an appropriate dividend level at the end of each financial year.

Rio Tinto’s peers Freeport-McMoRan (FCX), Anglo American (AAUKY), and Glencore (GLNCY) have already suspended their dividends to withstand the Market slump. BHP Billiton (BHP) has also abandoned its progressive dividend policy for a policy based on earnings payout.

Potential acquisition activity

While Rio Tinto’s management believes that most of the distressed assets for sale right now are of poor quality, it agrees that there are high-quality assets on the potentially distressed balance sheet, but they aren’t available on the market yet. RIO is keeping an eye on any such developments and could consider acquiring such assets, but not at the expense of the strength of its balance sheet.

The above-mentioned efforts, in conjunction with Rio Tinto’s debt repayment, should provide the company with enough flexibility to navigate this volatile commodity price (COMT) environment.

Advertisement

More From Market Realist