Rio Tinto Looks To Shore Up Balance Sheet By Selling Australian Copper Mine

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Rio Tinto (NYSE:RIO) is looking to receive final bids for its Northparkes copper mine in Australia by the end of this month, according to people familiar with the process. None of them have consented to appear on record though, citing the confidentiality of the process. Rio has an 80% stake in the mine and is hoping to raise up to $800 million through the sale.

The funds generated are expected to be used to cut down debt in order to maintain the company’s single-A credit rating. The two companies which are believed to be in serious contention for Rio’s Northparkes stake are Oz Minerals and China’s MMG Limited. The commodities markets have become quite volatile and so buyers are more cautious and not enough capital is being pumped into the sector. The Northparkes stake sale is being seen as much easier compared to stake sales in Rio’s other properties on the block. However, Sumitomo Metal Mining Company Limited, which owns the remaining 20% of Northparkes reserves the right to match the winning bid. If it chooses to do so, the process will take longer to complete. [1] See Full Analysis for Rio Tinto Here

Located in New South Wales, Australia, Northparkes is a joint venture between Rio Tinto and the Sumitomo Group. It produced nearly 54,000 tonnes of copper and 72,000 ounces of gold in 2012 (on a 100% basis).

Why Rio Has Put Some Assets On The Block

Apart from Northparkes, Rio has also put up for sale its majority stakes in Iron Ore Company of Canada and Coal & Allied in Australia. This is in addition to its diamond business and the Pacific Aluminum business which have been on the block for a long time now but haven’t found any buyers.

Rio’s performance in 2012 was very weak. It reported a net loss of $3 billion, down from a profit of $5.8 billion in 2011. This was largely due to the hefty $14 billion impairments it had to take on account of writedowns in the aluminum and Mozambican coal businesses. Underlying earnings in 2012 stood at $9.3 billion compared to $15.5 billion in 2011. This was due to a combination of lower prices of iron ore, aluminum and copper and a net negative effect from the variance in volumes. ((Rio Tinto 2012 Earnings Report, Rio Tinto Media Release)) At the time of announcing the results, management had said that the key priorities going ahead will be to achieve cost savings of $5 billion over the next two years and generate significant cash from the sale of non-core assets and businesses. At the same time, Rio is likely to go ahead with major expansion plans in the Pilbara iron ore region of Australia. This will require capital and unless Rio can maintain its credit rating by cutting down on existing debt it will be expensive for the company to raise new debt at reasonable yields in the future.

The Suitors

Analysts think that Northparkes would be a good fit for Oz Minerals which needs additional production to fill the gap between declining output at its Prominent Hill mine and the ramp-up of its Carapateena mine. However, Sumitomo also announced in February this year that it is keen to more than double its copper production to 300,000 tonnes per year over the next nine years. Considering that Northparkes could help it achieve that target and the fact that it holds the first right of refusal, Sumitomo appears a stronger contender to us. There have been reports of the Blackstone group being interested in Rio’s Iron Ore Company of Canada. This has given rise to speculation that other private equity firms are keen to enter the mining sector at today’s low valuations and may be considering bidding for Northparkes. [2]

Can Rio Hope To Meet Value Expectations?

Rio tried to sell the Northparkes mine in 2009 for more than $700 million, but it abandoned the process after bids failed to meet its expectations. Copper prices today are higher than at that time and Northparkes has also completed the expansion process which it had been awaiting when it previously went on the block. Also, Oz Minerals wasn’t interested in Northparkes then, but today it is hunting for acquisition opportunities. Although the mine does have further expansion potential in the future, buyers may not value that too highly since the grade of copper in the undeveloped area is expected to be much lower than the current ore grade. We think that whether or not Rio can get the $800 million it is looking for will depend on the extent to which Oz Minerals is prepared to go. If it bids too high, Sumitomo may back out. If not, an exercise of the first right of refusal will end up stretching the process.

We have a Trefis price estimate of $56 for Rio Tinto.

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Notes:
  1. Rio Tinto seeks final bids for copper mine in June, Sumitomo wildcard, Reuters []
  2. Rio Tinto draws up shortlist for Iron Ore Co. of Canada sale, The Globe And Mail []
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