Summit News

RIO Tinto is likely to pursue a buyback in the second-half of next year, with growth through M&A a bigger priority, according to analysts.

In analysts' digestion of yesterday's investor briefing with Rio iron ore boss Sam Walsh and chief financial officer Guy Elliott, UBS said Rio could follow larger rival BHP Billiton and conduct a buyback.

"We forecast Rio to generate $US14 billion in free cash flow in 2011-12 – potentially making a buyback increasingly likely in our view," said analyst Glyn Lawcock.

"For a $US10 billion share buyback we estimate 6.5 per cent earnings per share accretion in full-year 2012 and a 5 per cent uplift in net present value."

BHP this month reactivated a $US4.2bn buyback after its $US40bn bid for Canada's Potash Corp was blocked and said it may consider more after its first-half results in February.

But Lawcock said Rio alluded more to the potential for some small- to medium-sized merger and acquisition opportunities and "capital management would not be their first preference but would always be a consideration".

Macquarie's Lee Bowers agreed and said organic re-investment and opportunistic M&A remain Rio's highest priorities.

"As such, capital management in the form of buybacks or special dividends appears a low probability in first-half 2011."