Wizardry of Oz may pay off for miner

Just what the shrinking UK market needs: some uppity hedge fund demanding Rio Tinto junks its dual-listed corporate structure and unifies the shares Down Under.
It’s the call from Palliser Capital, a relative tiddler on the miner’s register, with only $250 million or so of a business valued at about £83 billion — once you add together the market caps of the UK-listed Rio Tinto plc and Aussie-quoted Rio Tinto Ltd. In Palliser’s view, this cumbersome structure has resulted in “an unmitigated failure for shareholders” that has “destroyed $50 billion of value”. So, why not unwind it, like rival BHP, and make kangaroo land the primary listing?
The London Stock Exchange can probably think of one good reason: it would mean losing one of the most valuable stocks in the FTSE 100, with any newly unified Rio relegated to a secondary quote. Yet, jingoism should not stand in the way of value creation. And neither should the suspicion that Palliser, whose stake is held across both Rio entities, is looking to make a nice gain from a spot of market arbitrage — not least when its campaign is being led by James Smith, a former Elliott exec who helped push BHP into its Aussie unification.
As things stand, Rio is an outlier, with not only BHP but the likes of Shell, Unilever and Relx switching to a unified group, even if, thankfully, via a primary quote in London. And, having first raised the issue in May, Palliser did provocatively pick Rio’s 2024 investor seminar yesterday to lob in its 48-page presentation.
Against that, Rio’s counter-arguments sound a bit glib. The best chief executive Jakob Stausholm came up with is that it “just does not make any economic sense”, while finance chief Peter Cunningham spoke of “friction costs in the mid-single sort of digits, billions”.
The structure harks back to 1995’s merger of the UK’s RTZ and Australia’s Conzinc Rio Tinto. And it has thrown up an oddity: 77 per cent of the group’s shares are held via the UK plc but, largely thanks to its vast iron ore mines in western Australia’s Pilbara region, 83 per cent of last year’s ebitda came out of Rio Tinto Ltd. Thanks to having two separate companies, Rio also lacks an equity currency for acquisitions — a handicap in a consolidating market. And even share buybacks are hard. To boot, the plc has long traded at a discount to the Aussie company, averaging 19 per cent over the last ten years, on Palliser maths.
A key reason for that? “Franking credits”, or the tax breaks Aussie investors get on dividends: a system to avoid double taxation. As cash must be repatriated out of Oz to fund the UK plc dividend, investors have missed out on $14.7 billion of such credits. Or so Palliser claims. On top, it says they’ve lost “$35.6 billion of additional book value” from Rio always paying for acquisitions in cash, sometimes at the wrong time in the commodity cycle — even if blowing $38 billion on Alcan in 2007 must account for a fair chunk of that. Going forward, Palliser also sees a “$28 billion upside” from axing a dual listing.
All these figures require proper interrogation. The market clearly needs tons of convincing: Rio’s London-listed shares fell 0.3 per cent to £50.07. Cunningham may be right, too, that unification would “blend” the share prices and “bring down” the “Limited share price a long way”. It’s trickier, too, than at BHP, where only 40 per cent of its value was in the UK plc, and whose shares have outperformed Rio since ending dual-listing in 2022. Rio has also said it may “rebalance” its 77/23 listing, possibly via share buybacks in the UK. Yet, all Palliser wants for now is an “independent” review. There’s a case for Rio having a proper dig into this issue.
Money talks. And nowhere more so than in takeover bids. So ask yourself this: how does the board of Direct Line square the following two things? First, rejecting Aviva’s £3.3 billion tilt, saying its 250p-a-share sighting shot “substantially undervalued the company”. And, second, having a bunch of non-execs who own hardly any shares in the business.
If they had faith in the insurer’s value, wouldn’t they have bought a few? Yet, of the ten non-execs, most do seem a bit tight on the share-buying front. Take Richard Ward, the senior independent director, aboard since January 2016. After eight years he owns precisely zero shares in the company. Then there’s Fiona McBain and Mark Gregory, who joined in 2018; zilch for them, too. Plus Adrian Joseph and the ex-FT hack Tracy Corrigan from 2021’s cohort — nowt for them as well. And not a sausage, either, for Mark Lewis or David Neave, who were appointed last year.
Indeed, of the ten, only three own any shares, the most held by the chair, Danuta Gray, a non-exec since 2017. She has 26,500, presently worth £62,740 at a share price of 236¾p, but still a pitiful sum compared to her £350,000-a-year fees. Gregor Stewart, aboard since 2018, owns 2,925, while Carol Hagh, who joined in April, has at least bought 10,000 shares.
Contrast Aviva, where all ten non-execs at the last annual report had shares, with chairman George Culmer owning 210,175, worth about £1 million. Its proposed bid may be a bit light but at least the board has some skin in the game.
At last, a fillip for Rachel Reeves’s budget. The OECD reckons that Britain will be one of the G7’s best performers in 2025, thanks to “the large increase in public expenditure”, with GDP growing at 1.7 per cent. After that? Oh, the economy will slow as a £40 billion increase in taxes “starts weighing on private consumption and additional government borrowing needs crowd out business investment”. Anyway, enjoy next year.