Rio Tinto (NYSE:RIO) seems to be sticking to its declared strategy of getting rid of businesses where it doesn’t see long-term growth potential or scalability. It earlier hived off some assets belonging to its aluminum business into a separate entity with the intention of selling it. The company’s diamond business has also been on the block for months now. However, Rio Tinto has reached a binding agreement to sell its 57.7% effective interest in Palabora Mining Company for $373 million. Along with Rio, Anglo American has also entered into a binding agreement to sell its 16.8% stake in Palabora for $103 million. The sale is subject to various government and regulatory approvals which are expected to take 4-6 months to come through. 
Palabora Mining Company’s assets include a large copper mine, a smelter and a refinery complex in the Limpopo Province of South Africa. It is South Africa’s only producer of refined copper and produces about 80,000 tonnes of refined copper per year, supplying most of South Africa’s copper needs and exporting the balance. 
- To What Extent Would The Commencement Of Production At Simandou Boost Rio Tinto’s Iron Ore Shipments?
- Rio Tinto Q1 2016 Production Review: Production & Shipments Continue To Rise Despite Subdued Iron Ore Pricing Environment
- By What Percentage Has Rio Tinto’s Capital Expenditure Declined Over The Past 5 Years?
- By What Percentage Can Rio Tinto’s Revenue & EBITDA Change Over The Next 3 Years?
- How Has Rio Tinto’s Revenue Composition Changed Over The Last 5 Years?
- What Is Rio Tinto’s Revenue And EBITDA Breakdown?
Why Does The Asset Not Fit Rio’s Strategy?
Palabora didn’t have the scale to fit Rio’s investment strategies. It is expected to run out of copper in early 2016. Even though studies were under way to extend its life, Rio may have thought that investing scarce capital into a depleting asset didn’t make sense.
There is a lot of unprocessed magnetite stockpile on the site. Magnetite is an iron ore product which is processed and used in steel manufacturing. Neither Rio nor Anglo American were interested in doing the same. Rio reasons that this activity falls outside its core strategic focus areas. Rio also said the mine needs a new owner who can develop the existing copper and vermiculite operations. 
What Are The Implications For Rio?
As far as earnings are concerned, in short, practically none.
Looking at Rio Tinto’s copper portfolio, it’s not difficult to see that the Palabora asset doesn’t contribute much to its profits. According to the company’s financial results for the first half of 2012, the Palabora asset contributed $27 million to the total net profit of $556 million from the copper business. The majority of profits were derived from much larger operations at Rio’s Kennecott Utah and Escondida copper mines.
The copper business itself is a small part of Rio’s overall portfolio as evident from the overall underlying earnings figure of $7.7 billion for the first half of 2012. The contribution from Palabora doesn’t seem to be much more than a rounding error. 
The significance of the sale lies not so much in the sale itself as in the insight it may provide into the management’s thinking at Rio. After Palabora, we think even the Northparkes copper and gold mine in Australia could be a good candidate for divestiture. The mine contributed $65 million in profits in the first half of 2012. It is thus a small operation and expected to be economically viable till around 2015. The resource may thus not have long-term growth potential. Rio holds an 80% stake in the asset. 
We have a Trefis price estimate for Rio of $45 which is nearly 15% below its market price.Notes: