By Louise Armitstead, 31, Jan 2011
Institutional investors have warned Rio Tinto and BHP Billiton that they will vote against the re-election of directors if they are not satisfied that the companies are committed to handing cash back. The shareholders, some of whom have big holdings in both companies, are concerned that the miners will use their strong balance sheets to pursue megadeals.
Rio is under particular pressure to return cash. In 2009 the company tapped its investors in a $15.2bn (£9.6bn) rights issue following the collapse of its $19.5bn deal with Chinalco, the Chinese state-owned group. Investors are demanding clear direction in the company's interim results statement due on February 10.
Rio's net debt now is $27bn lighter than it was at the end of 2009. As a result, investors are nervous that Tom Albanese, chief executive, wants to use the strong balance sheet to fund a big strategic acquisition. The company is currently in talks with Australian coalminer Riversdale over an agreed $3.9bn bid.
Rio approved major capital projects totalling $5.5bn during the fourth quarter last year. The company was lambasted by investors after it bought Canadian aluminium producer Alcan for $38bn in 2007 in a deal that severely damaged its balance sheet at the onslaught of the financial crisis.
BHP is expected to give a detailed update of its strategic plans at its interim results on February 16. In a bid to placate the shareholders, the company is thought to be planning to explain its intention both in terms of the balance sheet and its appetite for deals. The company announced its intention to do a £4.2bn share buy-back in November.
But for some investors, it is still not enough.
As revealed yesterday in The Sunday Telegraph, a group of shareholders has written letters to the boards of both companies to demand commitments to multi-billion-pound share buy-backs and dividends.
One of BHP's top 10 shareholders told the newspaper: "Frankly, after the Potash debacle, we are not too enamoured with BHP's bid ambitions. It was expensive and ambitious and even then Marius Kloppers [chief executive of BHP] told us that we wouldn't see the benefits of the deal for as long as 10 years. This is not the sort of thing we want him to spend the money on."
Last week BHP was rumoured to be plotting a bid for BG Group. Analysts at Exane BNP Paribas said a takeover would allow BHP to revitalise its oil and gas arm. (sourced:telegraph.co.uk)