The share price of Rio Tinto Limited (ASX: RIO) is defying weakness in the sector as the world's largest iron ore miner announced the completion of a billion-dollar share buyback and the impending start of another.
Rio Tinto's share price surged 2.3% to $83.11 in morning trade when BHP Billiton Limited's (ASX: BHP) share price and South32 Ltd's (ASX: S32) share price led the materials sector lower as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index fell 0.1% in the red.
Rio Tinto is probably supported by "top-up" buying after management announced that it has successfully bought back $2.9 billion of its shares in the latest off-market buyback where shareholders tendered their shareholdings at set discounts.
Shareholders who were successful in selling their shares back to the miner are probably jumping back in to buy back shares to top-up their shareholdings ahead of the start of Rio Tinto's on-market share buyback.
The miner said it will spend up to US$1.1 billion ($1.5 billion) buying back its own shares on the market commencing February 28, 2019.
Interest in the off-market buyback was so strong that Rio Tinto managed to secure the biggest discount of 14% from shareholders at a price of $69.69 a share.
The number of shares tendered exceeded what Rio Tinto was willing to buyback and so it has applied a scale-back of 58.27% after the first 70 shares from each tender.
The scale-back was anticipated but shareholders had to hold off their top-up buying until they knew how much of their shareholding would be accepted by the miner.
Shareholders with 30 shares or less after the tender process will have their shares bought back in full. This protects shareholders from being stuck with a small parcel of shares as a result of the capital return.
Shareholders are happy to sell at such a large discount as the amount they will receive from the sale will exceed the buyback price due to the attaching franking credits.
Those that benefit the most from such buybacks tend to be SMSFs, institutional investors and those with low marginal tax obligations.
Shareholders will be paid on November 19 and I suspect we could see another round of buying then.
Rio Tinto has bought back 41.2 million of its shares in the off-market tender. This equates to 10% of its ASX-listed stock or 2.4% of its total stock if its UK shares are included).
