Rio Tinto's 2Q iron ore party
A bumper second quarter reassures the diversified miner is on the right track, even if it is still in the 'sin bin' with shareholders
CEO Tom Albanese said, "Markets remained tough in the second quarter, as expected, particularly in aluminium." He reiterated Rio Tinto's focus on cost and debt reduction and alignment of production with demand. Fortunately there appears no shortage of demand in the key iron ore and copper markets. If Rio Tinto hadn't diluted those powerhouse business units with Alcan, it would have been steaming ahead right now. Albanese hinted at a slight improvement in still-difficult aluminium business conditions in the second quarter. We won't hold our breath. But Alcan is a world-class business; it's just operating in an environment of chronic overcapacity. If/when the aluminium worm turns, Rio Tinto should make for a very interesting ride. In the meantime, Rio Tinto has given itself breathing room, completing the $15.2 billion entitlement issue and finally beginning Alcan noncore asset sales. It sold Alcan Packaging Food Americas division for $1.2 billion.
We remain positive on Rio Tinto; the shares are still at a steep discount to fair value. We think Rio Tinto remains in the 'sin bin' following the Alcan acquisition and the ill-fated Chinalco courtship. The entitlement issue is a far better outcome and a step toward redemption. But it will take more than one good decision to assuage shareholders unhappy at having to put their hands in their pockets--that or a shakeup at board level.
Second-quarter strength in iron ore reflected Pilbara operations running at full capacity. Sources say the Chinese have now accepted the 33% decline in iron ore contract price already agreed with Japan--what a mess with the detention of Rio Tinto's China employees on suspicion of stealing state secrets (one man's state secrets are another's market research). Hopefully the diplomatic crisis can abate quickly and everyone can get down to doing what they do best.
