Rio Tinto Woos Chinese

The week ended Jan. 31, the fourth trading week of 2009, was rife with speculation over Rio Tinto’s future, and just what the debt-crippled giant might hand over to its deep-pocketed 9% shareholder, state-owned Chinese aluminum major Chinalco. You might regard it as another small move in a historical geopolitical power shift from West to East.

Now that BHP Billiton’s bid for Rio Tinto is off the table, the pressure is getting intense for Rio Tinto management to meet its pledge to chop at least US$10 billion from its US$37-billion debt load before the end of the year.

During the week, Rio Tinto sold to Vale its undeveloped potash assets in Argentina and Saskatchewan, as well as the Carumba iron ore mine in Brazil for a total of US$1.6 billion. It then confirmed it was in discussions with Chinalco regarding the sale of minority interests in some of the group’s operating businesses, as well as possible convertible instruments.

This latest asset sale follows Rio Tinto’s recent unloading of its interest in China’s Ningxia aluminum smelter for US$125 million and last year’s sale of its Greens Creek mine in Alaska (US$750 million); its interest in the Cortez mine in Nevada (US$1.69 billion); and the Kintyre uranium project in Western Australia (US$495 million).

For its part, Chinalco is said to be especially interested in becoming a joint-venture partner with Rio Tinto at the latter’s iron ore and coal assets in Australia. Also of interest to Chinalco are large copper assets, such as Rio Tinto’s stake in Escondida, the world’s largest copper mine, in Chile. These types of sales would allow Rio Tinto to quickly hit its US$10-billion debt-reduction target.

On the buyer’s side, it’s all part of the Chinese government’s long-term aim to secure low-cost raw materials for its growing economy, and now is an especially good time to buy, with commodity prices having at last bottomed out.

If Chinalco wants to buy more Rio Tinto shares, it’s limited to a 15% interest under current restrictions imposed by the Australian government, though if Chinalco boosted its stake to the current maximum, that would still be a US$2.8-billion cash infusion. A short-term way for Chinalco to further invest in Rio Tinto and still get around the 15% barrier is to take on some type of convertible instrument.

Left out of the recent asset-sale talk has been Rio Tinto’s high-quality and successful diamond business. It’s not a core asset and holds little strategic interest for the Chinese government, though Harry Winston has expressed an interest in upping its stake in the Diavik mine it shares with Rio Tinto.

As for a Rio Tinto rights offering, it’s widely seen as management’s last choice as a fundraiser.

• In Canada, miners were focused on the new federal budget, which saw the minority Conservative government lay out plans for a $34- billion deficit this coming fiscal year, after promising no deficits during the federal election campaign just a few months ago.

For mineral explorers active within our borders, the biggest impact was the gratefully received, one-year extension of the Mineral Exploration Tax Credit, and the allowance for money raised in the first three months of this year to be spent before the end of 2011.

Those with operating mines in northern Canada will welcome the federal government’s continuing strong support of aboriginal training programs in the form of $175 million in new money committed to the task over the next three years.

Investors will warm to the federal government’s ongoing push for a single securities regulator, with the plan being for provincial regulators to be able to voluntarily join a national regulator to be defined in a new securities act to be tabled later this year.

Potential borrowers in the mining community will give a thumb’s up to the fed’s Extraordinary Financing Framework, which will pump up to $200 billion into frozen credit markets.

Other benefits to miners are: plans to streamline the cumbersome project approval process; changes to work-sharing programs; quicker writeoffs and lower tariffs on machinery and equipment; and a $1- billion fund to help resource-dependent communities.

• Caterpillar, the world’s largest maker of mining and construction machinery, announced it was cutting 22,000 of its 113,000 employees worldwide as it recorded a 32% drop in fourth-quarter earnings. It’s all in response to falling commodities markets, constricted credit, and the housing bust. Caterpillar’s stock, which has been part of the Dow Jones Industrial Average since 1991, now trades below US$30 after starting the year at US$44.71.

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