Rio Tinto Sells Michigan Asset To Raise More Funds

Rio Tinto (NYSE:RIO) has reached an agreement with Lundin Mining to sell its Eagle nickel and copper project in Michigan for $325 million. The transaction is expected to close in the third quarter this year and is subject to regulatory approvals. The company has already put up for sale its majority stakes in the Northparkes copper mine in Australia, the 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 over a year now but haven’t found any buyers. ^[1]

Rio has called the sale a part of its efforts to divest non-core assets to generate substantial proceeds. The funds generated are expected to be used to cut down debt in order to maintain the company’s single-A credit rating.

Lundin Mining Corporation is a diversified base metals mining company with operations in Portugal, Sweden and Spain, producing copper, zinc, lead and nickel.

See Full Analysis for Rio Tinto Here

The Eagle Project

The Eagle project in the Upper Peninsula of Michigan in the United States comprises a high-grade underground nickel-copper mine and mill. The project construction started in 2010 and the development is about 55% complete. The mine is expected to produce an average of 16,000 tonnes of copper and 13,000 tonnes of nickel per year over a period of seven years. For the first three years, the average annual output is estimated at 23,000 metric tons of nickel and 20,000 tons of copper. The mine will also produce precious metals and cobalt. Rio had approved a total capital expenditure of $0.5 billion for the project, of which $0.3 billion had already been spent by the end of 2012. ^[2]

Why Rio Has Put Some Assets On The Block

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.

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.

More Sales To Happen Soon?

According to the Deutsche Bank, Rio Tinto has the potential to sell more than $10 billion worth of producing and undeveloped assets. The market is abuzz with speculations that China’s Shenhua Group, Coal India and Aditya Birla Group of India have expressed their interest in bidding for Rio Tinto’s coal assets worth about $3 billion in Australia. Also, bids are expected this month for the company’s Northparkes copper and gold mine in Australia, in which the Sumitomo Group holds a 20% stake and the right to match any bid for Rio’s stake. There have also been reports of the Blackstone group being interested in Rio’s Iron Ore Company of Canada. ^[3]

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

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1. Rio Tinto agrees sale of Eagle project, Rio Tinto Press Release [↩]
2. Rio Tinto 2012 Annual Report, Rio Tinto Website [↩]
3. Rio Tinto to sell US mining project, flags further deals, The Australian [↩]