Rio Tinto Sells More Assets To Pare US$37B Debt

Rio Tinto (RTP-N, RIO-L) continues to hack away at its immense debt load with sales to Vale (RIO-N) of its undeveloped potash assets in Argentina and Canada and an iron ore mine in Brazil for US$1.6 billion.

The Anglo-Australian giant announced the sale on Jan. 30, the same day it confirmed speculation it had held talks with Aluminum Corp. of China (ACH-N), or Chinalco, to sell the Chinese state-owned company minority interests in some of the group’s operating businesses, as well as possibly investing in convertible instruments.

The moves are part of Rio Tinto’s plan to slash US$10 billion from its US$37-billion debt burden by the end of the year.

Under its agreement with Vale, Rio Tinto will sell its potash assets, including Potasio Rio Colorado, Argentina’s first potash project, and Regina Potash, a 1,200-sq.-km property in Saskatchewan.

Rio Tinto will also hand over Corumba, an open-pit iron ore mine in western Brazil. The iron ore mine contributed earnings of US$6 million in the first six months of 2008 and US$12 million for all of 2007.

“This is a very positive step towards meeting our commitment to reduce debt by US$10 billion in 2009,” Gary Elliot, Rio Tinto’s chief financial officer, said in a statement. The deal follows the sale in January of Rio Tinto’s interest in China’s Ningxia aluminum smelter for US$125 million.

Last year, asset sales netted the company nearly US$3 billion, including the sale of its interest in the Greens Creek mine in Alaska (US$750 million); its interest in the Cortez gold mine in Nevada (US$1.69 billion) and the Kintyre uranium project in Western Australia (US$495 million.)

Last year Chinalco, acting with Alcoa (AA-N), bought 12% of Rio Tinto’s London-listed shares for $14 billion. The transaction gave Chinalco and Alcoa a 9% stake in the group.

Chinalco may decide to increase its stake given China’s appetite for the natural resources Rio Tinto has in its worldwide stable of properties. Rio Tinto produces aluminum, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt and talc), and iron ore.

In a Feb. 2 client note, Citi Investment Research, a division of Citigroup Global Markets, noted that Chinalco might be interested in joint-venture assets in coal and iron in Australia.

Citi calculated that a 15% interest in Hamersley Iron, for instance, would be worth about US$5.4 billion and a 25% stake in Rio Tinto’s Australian thermal coal operations about US$2.2 billion.

Hamersley, in Western Australia, is wholly owned by Rio Tinto’s iron ore group. Hamersley holds six mines and also operates the 60%- owned Channar mine, a joint venture with an Australian subsidiary of the China Iron & Steel Industry & Trade Group Corp. and the 54%- owned Eastern Range mine, a joint venture with Shanghai Baosteel Group.

Citi analysts also pointed out that a convertible instrument “could term out maturity of Rio’s debt (US$8.9 billion in 2008 and US$10 billion in 2010) and if done in conjunction with a placement, could provide a short-term sidestep around the current 15 per cent holding restriction imposed by the Australian government.”

They also argued that a rights issue is “unlikely” and is viewed as a “last resort” because asset sales “could still surprise to the upside as the sale of Corumba and Potash,” has demonstrated.

At presstime, Rio Tinto is looking for a new chairman owing to the resignation of Jim Leng, less than a month after he was appointed to the position, reportedly due to his opposition to the rapprochement with Chinalco. Current Rio Tinto chairman Paul Skinner, who was due to step down in April, will remain until mid-year, by which time a successor will be chosen.