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Rio Tinto’s reaps rich reward from Hunter coal sale

Rio Tinto officially handed over the key to its Hunter Valley coal business on Friday, prompting renewed speculation about what it will do with the proceeds from the $US2.69 billion ($3.5 billion) deal.
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The sale of the Coal and Allied business to Yancoal delivered $US2.45 billion in cash to Rio on Friday.

The mining giant also confirmed it received its first royalty payment, of $US10 million, on Friday. And it said a further $US100 million in royalty payments would be received by the end of this year, while “a further $US90 million is expected before the end of 2018”.

Completion of the deal, which happened relatively quickly given Rio shareholders backed the board’s decision to sell to Yancoal only as recently as the end of June, means the cashed-up miner has become even more flush with cash.

Rio pleased its shareholders and the wider market when it announced its half-year results in early August, as it reported underlying earnings of $US3.94 billion ($4.95 billion) for the half-year, and declared an interim dividend of $US1.10 (fully franked).

The signs of the miner’s healthy cash position were clear. The $US1.10 interim dividend was a record interim dividend for the company, which also announced a $US1 billion increase in its share buyback of its London-listed shares.

Asked what Rio would do with its large influx of cash from the Coal and Allied Sale, Morningstar resources analyst Mathew Hodge said: “That’s the $64 million question, isn’t it.”

More debt repayment, and some more money for shareholders, were the two most likely uses for the money, Mr Hodge said.

“I don’t think they’re going to decide to ramp up organic capital expenditure, that would be a bit of a surprise, and an acquisition would be a bit of a surprise too,” he said.

Mr Hodge said he did not expect an out-of-cycle dividend from Rio.

Macquarie analyst Hayden Bairstow said: “The Coal and Allied deal [would] underpin another big buyback through next year, and probably a better final divvy [dividend]. I don’t think it’s any more than that, and I don’t think you’ll get it early.”

In a statement on Friday Rio said the money would be used “for general corporate purposes and the group’s capital allocation framework will be applied”.

Rio didn’t respond to specific questions on Friday from Fairfax Media about how it would use the extra cash.

But in August, in a conference call with analysts, Rio CEO Jean-Sebastien Jacques said that while “shareholders should expect good returns”, Rio would not declare anything until the cash was on the balance sheet and proper process had been followed.

Pressed further on whether Rio would consider “out of cycle returns” and pay a special dividend outside the normal interim and final dividend framework, he said: “The only thing I can say is, clearly, we will have a chat to the board when we get the cash on balance sheet, but I can’t give you any indication about the timetable on this one. But I can tell you for a fact that by February, when we have the board meeting to review the final results, we will have an answer to your question.”

Shares in Rio climbed 44?? on Friday, to close at $68.28.

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