JPMorgan, BlackRock Differ From Rio CEO Walsh on Returns

Rio Tinto Group Chief Executive Officer Sam Walsh last week signaled that mining investor attitudes toward spending on expansion are starting to shift after a recovery in metals and share prices.

Investors have started to refocus on growth and expansion plans rather than concentrating only on returns, Walsh, 64, said at an industry event in Perth, Australia last week. Mining companies should retain their focus on giving back excess cash to shareholders and shy away from mergers and acquisitions, two of the industry’s largest investors said.

“It does seem slightly baffling for him to have come out with that statement so early on really,” James Sutton, a portfolio manager at JPMorgan Asset Management’s $1.9 billion Natural Resources Fund in London, said today in a phone interview. “In terms of the worst culprits of capital ill discipline, I don’t think they’re off the leash yet.”

Mining companies have been reining in spending after a $250 billion investment spree marked by poorly timed acquisitions and asset writedowns sparked investor criticism. As a decade-long boom in metal prices petered out, producers have focused on preserving capital and bolstering dividends.

“If you look at investors globally, there was certainly a time when global investors were more focused on returns,” Walsh said. “Since the beginning of this year, we’ve actually seen a shift. I think it’s far more balanced; that we’ve now got investors refocused on growth, expansion, as well as shareholder returns.”

‘Damaging Strategies’

Walsh replaced Tom Albanese at the head of the world’s second-largest mining company in January last year following failed deals in coal and aluminum. He cut $2.3 billion from costs last year and is seeking to a further reduction of $1 billion this year.

BlackRock Inc.’s Evy Hambro, who manages the $8 billion World Mining Fund, said mining CEOs should maintain their commitment to rewarding investors. Rio is the fourth-largest holding in Hambro’s Fund at 7.7 percent. The 101-member Bloomberg World Mining Index advanced 5.4 percent in July to reach the highest monthly close in 16 months.

“Given the recent strength in the sector, the market is starting to acknowledge managements’ focus on returns for shareholders,” Hambro said in e-mailed comments yesterday. “It would be foolish for the executives and boards to put this nascent recovery at risk by reverting back to the damaging strategies of the last cycle.”

A London-based spokesman for Rio declined to comment.

Shareholders Important

There’s been no change of strategy at Rio, Walsh said at last week’s event. The company raised its dividend 15 percent in February after reporting a 43 percent gain in second-half profit.

“Shareholder returns are very important to me and to the company,” he said. “That’s why we’re in business: to provide returns to our shareholders. We should never lose sight of that. But it’s also, you know, long-term shareholders as well as short-term shareholders. We need to get that balance right.”

Analysts widely expect BHP Billiton Ltd. and Rio to announce share buybacks in the next six months. Macquarie Group Ltd. analysts have said they’re “not convinced a buyback is due or that it would be a responsible use of funds” for BHP.

Rio Tinto this week drew a line under one of its most disastrous deals by selling its Mozambique coal assets for $50 million. The company bought the projects as part of a $3.7 billion purchase of Riversdale Mining Ltd. in 2011 before writing them down by $3 billion last year.

“I don’t think that the large-cap mining companies have got the mandate from the generalist investor to go on an acquisition spree any time soon,” JPMorgan’s Sutton said. “They always have to consider their pipeline and to consider the reserve lives of their various commodity exposures. So it can’t carry on indefinitely, this halt to capex and acquisitions.”

The JPMorgan Natural Resources has Rio as its fifth-largest holding, with a 4.6 percent weighting.

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