Rio Tinto: all kinds of trouble

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Just months ago, Rio Tinto was a behemoth swaggering from the huge run up in commodity prices.  This is a company that had revenue of nearly $30 billion and net income of nearly $8 billion in 2007. It was worth over $160 billion by May as the commodities boom took shape.

They were everywhere: building projects in Saudi Arabia, resisting a takeover by BHP Billiton and operating across the globe.  Most of that is history now, except for the debt.

Rio Tinto Group, the world’s third- largest mining company, had ratings on $5 billion of its debt cut by Moody’s Investors Service after failing to meet asset sale targets.

Rio’s earnings may also be affected by falling metal prices, including expected declines in iron ore next year, Moody’s said yesterday in a statement. It lowered London-based Rio’s rating to ‘Baa1’ from ‘A3,’ and has a negative outlook on the company.

Rio plans to eliminate 14,000 jobs, more than halve capital spending and sell mines to reduce debt by $10 billion by the end of 2009 as demand for metals sinks. Its needs to sell assets over the next few months to help clear debt, the ratings service said.

“A key factor in the company’s rating will be its ability to execute on its divestiture program and reduce debt over the next 12 months,” Moody’s said. That includes $8.9 billion due next October and $10 billion due a year later, it said.

Rio declined 1.2 percent to A$39.80 on the Australian stock exchange at 11:55 a.m. Sydney time. It has declined 38 percent since BHP Billiton Ltd. scrapped its hostile $66 billion takeover bid on Nov. 25, citing Rio’s $38.9 billion of debt, slumping metal prices and global turmoil on financial markets.

Ed here. You will notice that BHP Billiton made a $66 Billion offer according to this article by Bloomberg. That was the value of the offer after share prices had already cratered. Originally, the offer was much higher and would have created a mining juggernaut worth $252 billion when it was made in November of last year. Rio is now worth $31 Billion.

But, it gets worse. Rio is firing people left and right and pulling out of projects and selling assets in order to save cash. That’s the profile of a company in trouble: high debt, plunging stock, plunging prices, cutting staff and capital spending. Maybe they shouldn’t have loaded up on debt in acquiring Alcan.

Citing the “unprecedented rapidity and severity of the global economic downturn,” the company said it will slash as many as 14,000 job roles globally, including 8,500 contractors.

In addition, the Anglo-Australian company will cut in half capital expenditures for next year and sell further “significant” assets.

Analysts cheered the downsizing, saying it shows the degree of conviction that Rio Tinto’s management has in reining in expenses.

In all, the measures are intended to cut the company’s net debt by $10 billion by the end of 2009. Rio Tinto said it will also trim operating costs by at least $2.5 billion a year in 2010.

The reduction in debt will be on top of the $3.2 billion already paid down since the end of June. At Oct. 31, net debt stood at $38.9 billion.

Rio Tinto also effectively abandoned its policy of progressively higher dividend payouts, which has been in place for 30 years. Instead it said the total dividend payout for 2008 will be held steady at $1.36 a share.

“This is one quick way to shore up the balance sheet and put confidence back in the company,” said Jonathan Barratt, managing director of Commodity Broking Services in Sydney. “When you are looking to offload so many people around the world, it goes to the bottom line quite quickly.”

Here’s a blurb from the Sydney Morning Herald today showing how desperate things have become.  Rio Tinto took on too much debt in acquiring Alcan at the top of the market. Now they are selling assets.You should note the reference to Xstrata. It is owned by Glencore of Switzerland, another commodities company I don’t particularly like.

Mining giant Rio Tinto is hiving off assets to pay down $US40 billion ($57 billion) in debt after BHP Billiton withdrew a $US66 billion bid, but in these turbulent times, who’s buying?

Bankers and analysts say the world’s largest miner BHP, Brazil’s Vale, Switzerland’s Xstrata and China’s aluminium giant Chinalco, parent of Chalco, are all eyeing Rio’s diverse collection of assets.

Most have the cash to pounce on any near-term opportunities.

“The two with the most cash, BHP and Vale, they’re definitely looking at the situation,” one Hong Kong-based resources banker at a Wall Street firm said.

“Xstrata is still highly leveraged. Its stock has taken a beating – it’d be interested, but has less ability to do a big deal,” the banker said.

Now you’ll remember I posted a blurb in August about this company’s CEO Tom Albanese making ridiculous predictions about commodity prices and skyscapers in China.

Rio Tinto yesterday shrugged off talk of an impending collapse in the commodities market, pointing to recent research that suggested China will build up to 50,000 skyscrapers in the next 20 years, the equivalent of 10 New Yorks, creating sustained long-term demand for steel and other raw materials.

The mining group reported half-year profits of $5.5bn (£3bn), a 55% increase on the same period a year earlier, providing the company with ammunition in its battle to see off a hostile bid by BHP Billiton valued at about £70bn.

Rio’s chairman, Paul Skinner, said the board’s view was unchanged since BHP increased its bid in February. “The offer on the table is still short of what we would consider full value for Rio Tinto and its prospects, and these results emphasise that,” he said. “We are demonstrating what Rio Tinto is really capable of.”…….

By 2025, the report predicts that China will have 221 cities with more than a million inhabitants, compared with 35 in Europe today. As well as the need for huge spending on infrastructure, McKinsey projects that China will build between 20,000 and 50,000 skyscrapers, many of them in less developed interior provinces far from Beijing and Shanghai.

The company’s revenue from China in the first half more than doubled on the previous year, from $2.4bn to $4.9bn. Group revenue topped $30bn.

“There is no question that we are living in an era of unprecedented demand for minerals and metals,” said Rio’s chief executive, Tom Albanese.

hmmm…. Houston, I think we have a problem.

rio-tinto-2008-11-18-400x201.pngSources Rio Tinto pulls out of $10bn Saudi project – Telegraph Rio Tinto to cut jobs, pare debt and capital spending – Market Watch Moody’s Cuts Debt Rating on Part of Rio Tinto Debt – Bloomberg Chinese skyscraper builders to put up equivalent of 10 New Yorks, says Rio Tinto – Guardian Rio’s selling, but who’s buying? – Sydney Morning Herald

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3 Responses to "Rio Tinto: all kinds of trouble"

  1. michael niddrie   December 18, 2008 at 3:24 pm

    You are quite right in summing up the situation, and I hope the “Skinner and Albanese Board” legacy will be recognition that self serving considerations should not be allowed to prevail above those of what is in the best interests of the smallest of shareholders. I must say the callibre of the board is similar to a number of other companies that travelled this same path. You would think that they would have drawn on the lessons of others but they didn’t, but then again arrogance and big heads never seem to be able to relate to us simple souls.Keep up the good work of dishing up the facts to these donkey’s it may finally sink in.footnote: in fairness please dont overlook the cashflows and valuations which should be what it is all about in the end.

  2. kevin tan   December 20, 2008 at 9:04 am

    fyi