Rio Tinto (NYSE:RIO) has received a binding offer from HIG Capital, a U.S. private investment company, for its European specialty alumina business. Last October, the company announced plans to sell part of its aluminum business as part of its strategy to trim non-core and high cost assets and create value through iron ore. 
In addition, the company has scrapped its deal with Malaysian company CAHYA Mata Sarawak (CMS) to develop a $2 billion aluminum smelter in Malaysia citing failure to finalize power supply terms.  Rio Tinto’s product portfolio spans across basic metals like iron ore, copper and aluminum to energy products like coal and uranium. Its competes with mining giants such as BHP Billiton (NYSE:BHP), Vale (NYSE:VALE) and Freeport McMoran (NYSE:FCX).
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Receives interest for alumina assets in Europe
Rio Tinto is in talks with HIG Capital, which has expressed interest in the company’s European specialty alumina business. HIG Capital has prior experience with aluminum when it invested in an aluminum extrusion company Signature Aluminum in Pennsylvania. While term have not been disclosed, Rio Tinto is consulting with unions and will respond after these meetings.
This certainly is a good news for Rio Tinto whose aluminum business has suffered significantly due to recession. The company had written down nearly half of its investment in Alcan, which it acquired in 2007 for $38 billion. Last year, as part of its aluminum divestiture, the company spun off its higher-cost aluminum assets in Australia and New Zealand into Pacific Aluminum, a distinct entity from Rio Tinto Alcan and put many aluminum assets on the auction block. The company has so far closed one aluminum smelter in the UK and is considering capacity cuts at other plants.
Aluminum contributes to nearly 20% of our price estimate for the company. Any significant development towards selling off aluminum assets will have significant effect on that.
Scraps plans to develop aluminum smelter in Malaysia
The company has scrapped its deal with CMS, a Malaysian construction and building materials firm to develop a $2 billion aluminum smelter plant in Malaysian state of Sarawak. They could not agree on power supply terms with Sarawak Energy. Many are speculating if China’s oversupply in the aluminum market to keep its input costs lower could have prompted the company to take such steps.
Had the company decided to go ahead with the project as opposite to its recently announced strategy to get rid of non core aluminum assets, it would have sent contradictory message and raised more questions among investors.
We are in the process of revising our price estimate for the company.Notes:
- Rio Tinto receives binding offer for its specialty aluminas business, Rio Tinto Press Release, Mar 28 2012 [↩]
- Rio Tinto, CMS scrap $2 bln smelter project in Malaysia, Reuters, Mar 27 2012 [↩]