Better late than never as Rio begins sell-down
Rio Tinto has finally started the sell-down of non-core components but it still remains in the 'sin bin'
The Food Americas division generated US$1.5 billion in revenue in 2008, 23% of Alcan Packaging's total revenues. This component is likely to represent a higher-margin portion of what is a low-margin business overall. Rio shareholders can still expect a further US$2.5 billion from the balance of the packaging businesses. That would take the total sale proceeds to around US$4.0 billion, considerably lower than levels anticipated at the time of Alcan's purchase.
The urgency for asset sales has diminished. Rio is already able to meet its 2009 and 2010 debt repayment obligations. The rights issue reduced net debt from US$38 billion to US$23 billion. Net debt to equity fell to a manageable below-50% level and with BHP cash will fall comfortably below 30%. The additional cash is welcome regardless, giving Rio confidence to ride out any additional commodity price slide, should that occur. It also helps to tackle any uncertainty surrounding the possible end of the contract iron ore pricing mechanism. Reinstatement of full dividends and reactivation of expansion programmes can be expected if commodity markets move to the upside.
Rio sold down US$3 billion of assets in 2008 and, excluding packaging and Western Australian iron ore, US$2.5 billion this year. The balance of US thermal coal assets is on the blocks after the sale of Jacobs Ranch Coal for US$760 million earlier this year. The Borates business was taken off the market after the sales process didn't achieve "acceptable" value. Other potential candidates are Rio's 68% ERA stake, which is likely to generate in the vicinity of US$3.0 billion, and Rio's 75.7% interest in Coal & Allied, which will generate that or higher. These are more highly prized assets that are less likely to be offloaded at any price. The company would probably want a very good price or something particularly worthwhile to do with the proceeds to justify their sale.
Rio remains in the 'sin bin' and there is likely some overhang of cheap stock from the entitlement issue weighing on the price. A true narrowing of that price discount versus BHP is unlikely until the board has in some way, shape, or form paid penance for its sins. Replacements would hasten the process.
