Rio Tinto Slimming Down To Win Alcan

HONG KONG - To fund its expensive wedding to Canadian aluminum producer Alcan, Rio Tinto is going to have to sell some assets. Rio Tinto CEO Tom Albanese and finance director Guy Elliott presented analysts Tuesday with a list over $10 billion in assets they are looking to offload in areas including industrial minerals, non-core thermal coal, gold, and uranium, such as its 68% stake in Energy Resources Australia, and Iron Ore Co. in Canada. If the $38.1 billion takeover goes through as expected, the Anglo-Aussie mining giant may also divest Alcan's packaging business, valued at about $4.4 billion. Rio Tinto announced its friendly offer for Alcan last Thursday, rescuing the Canadian company from a hostile takeover attempt by U.S. rival Alcoa. In a research note issued after the briefing, UBS said Rio Tinto's intention to sell up to $14.5 billion in assets is more than the market had been expecting. Elliot said Rio Tinto's balance sheet had been "lazy" but the Alcan deal "would take it to the other extreme," according to UBS's note. Upon completion of the takeover of Alcan, Rio Tinto is expected to see its gearing, or debt to total capital ratio, boosted to 64%. With the help of asset sales as well as stable operating cash flow, USB estimated Rio Tinto's gearing will eventually drop close to 30% by the end of 2008. Elliot said at the briefing that the miner didn't need a rights issue to fund the deal, but he did not rule one out the possibility. Despite its huge cost, Rio Tinto reiterated that the Alcan deal was highly synergistic, and likely to pay off given the robust demand for aluminum expected from China for years to come. UBS estimated that Rio Tinto, which plans to name the combined entity Rio Tinto Alcan, could pare over $600 million in costs, exceeding the amount announced by Rio Tinto last Thursday. "In our opinion, this transaction remains a 'trust-us' deal. And, as we have said before, overall we believe that Rio Tinto's track record of focusing on and discipline with value-creating deals is very solid," UBS said.