Rio Tinto under pressure on asset sales

Global miner Rio Tinto said on Wednesday it was confident it could sell billions of dollars in assets to pay down massive debt, despite concerns about a lack of buyers, a day after rival BHP Billiton dropped a bid for the firm.

BHP’s shock decision on Tuesday to pull its $66-billion bid sent Rio’s shares plunging by almost 40%, amid concerns Rio would struggle to sell assets and cut its $39-billion in net debt during a severe global economic downturn.

Analysts questioned Rio Tinto’s confidence it could sell assets in the next few months.

“That’s by no means certain,” said FW Holst analyst Rob Craigie. “There may be additional assets they would consider selling. But the environment over the next six to 12 months is not going to be a good environment for selling assets.”

BHP Billiton cited Rio’s debt position in scrapping its hostile bid approach, as well as sliding metals prices, the threat of global recession and demands from European competition regulators to sell off some iron ore and coal assets.

But Rio chairperson Paul Skinner, speaking at a scheduled business breakfast, said the group was comfortable with its financial position, remained committed to increasing its dividend, and dismissed market speculation Rio would now need to raise equity.

He said it would make asset sales in the next few months.

“We now move on, we have a very strong company,” Skinner told reporters.
“We are confident with our financial position. We have other ways of managing our debt.”

Credit rating agency Moody’s immediately signalled a possible downgrade to Rio’s high-investment-grade A3 rating, noting that asset sales would be a key focus of its rating review.

Assets on the block include a major packaging business, aluminium products, its US coal business, an Australian copper mine and its US Sweetwater uranium mine.

Rio Tinto spokesperson Amanda Buckley said the company was focusing on selling the assets flagged, but had no immediate comment on whether it was considering other asset sales.

BHP’s Rio bid was hatched last November, as mining boomed on soaring demand for iron ore, steel and other resources from China and other emerging markets. At its peak, the all-share offer valued Rio at about $193-billion, promising to be the second-largest takeover to date.

Rio Tinto shares dropped 36% in the first trading in Australia after BHP abandoned the bid, matching a slide in its London-listed shares. BHP jumped as much as 9% in Australia, following a 7% rise in London.

Fund managers said Rio’s slide partly reflected uncertainty over how it would reach its target for asset sales.

“The market for resource assets has clearly become more difficult,” said Neil Boyd-Clark, portfolio manager at Fortis Investment Partners. But he added Rio Tinto had world class operations that would attract buyers who could pay for them.

Eyes on China
Aluminum Corp of China (Chinalco), which in February bought a stake in Rio in a move widely seen as an attempt to win leverage over the bid, said it planned to raise its 12% stake to at least 14,99%.

Chinalco’s US partner in the stake, Alcoa, had no immediate comment, but noted the companies previously said they wanted to increase their stake in Rio. Chinalco and Alcoa have lost about $11-billion, or three-quarters of the value, on their investment.

Rio took on debt to finance its $38,1-billion purchase of Alcan in late 2007, and committed to sell $15-billion in assets, including $10-billion this year, but the timeframe has slipped.

“There is clearly a lot to do over the coming months for Rio Tinto,” Skinner said. “We have $9-billion debt due October 2009, and we don’t see any need to issue equity to meet that.”

BHP will write off about $450-million in bid costs, and is also taking $2,1-billion in pretax writedowns on nickel assets.

Rating agency Standard & Poor’s signalled it still might downgrade BHP’s A+ rating, partly depending on the company’s capital management, acquisition and expansion plans.

Fund managers said they did not expect any serious pressure on BHP’s CEO or chairperson to quit over the failed bid.

“[CEO Marius Kloppers] has not necessarily made a mistake. But the world has changed and there’s little point in destroying shareholder value,” said Peter Chilton, analyst at Constellation Capital Management, which has stakes in both BHP and Rio. - Reuters

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