More Rio assets will be up for grabs this year

RIO Tinto is putting together a new list of assets for sale and is believed to be assessing the merits of a $US2 billion dividend reinvestment plan. This comes as the miner has more than $US8.9 billion ($12.8 billion) worth of debt due in the next 10 months, a quarterly production report due out in 12 days and its full-year profit to be released next month. Rio will release its full-year results on February 12 and investors are expecting clarity on how it plans to rebuild the company, including details of the operational spending savings on specific projects. There is also an expectation that it will give details of the broadened list of assets it plans to sell. If it fails to give enough clarity, its shares will be pummelled. Assets expected to be included on the sale list include its 76 per cent stake in Coal & Allied and its Pacific Coal business, which has a net present value of $US6.5 billion on Citi numbers. It is believed to be looking at selling its Gove alumina refinery, which could fetch up to $US5.3 billion, and a 68 per cent stake in uranium group ERA. And there is renewed talk that if commodity prices remain under pressure Rio will raise additional capital through a deeply discounted placement. Chairman Paul Skinner ruled out an equity raising, but that was a few weeks ago. So far, Rio has failed to sell most of the non-core assets flagged for sale after the purchase of Canadian aluminium giant Alcan in 2007 for $US38 billion. A combination of wanting too much and would-be buyers struggling to get credit has left it in a situation where it is now flagging a widening of its asset sales. Its majority stake in Coal & Allied would no doubt attract interest from one of the Chinese miners or BHP, which is part owner in the new NCIG coal terminal at Newcastle. Coal & Allied is listed on the ASX and therefore more liquid than some of the other assets. In addition, thermal coal has not been as badly affected as coking coal. Other options include reducing its 80 per cent stake in QAL Alumina Refinery to 50 per cent and selling its 30 per cent stake in the Escondida copper mine in Chile. BHP Billiton owns 57.5 per cent of Escondida and would be the most likely interested party. In a recent strategy update last month, Rio chief executive Tom Albanese said the company would sell up to $US10 billion in assets by the end of 2008 due to tough market conditions that have put pressure on the company's balance sheet. Rio's share price has fallen more than 30 per cent since BHP abandoned a takeover offer to create the biggest mining company in the world. Since Rio hit a peak on May 19 of $156 a share, its shares have fallen 75 per cent, putting massive pressure on the chief executive and chairman, both of whom have been criticised for failing to properly engage with BHP. Its shares closed yesterday at $38.94. Skinner has signalled that he will step down next December but there are some mutterings that he might go earlier, particularly as the company stares down the barrel of debt and struggles to find buyers for some of the non-core assets it acquired as part of its Alcan deal. The brutal reality is that the board should have either sold or spun off these non-core assets, including the multibillion-dollar Alcan packaging business as soon as the Alcan transaction was completed. Instead senior management and the board dragged their feet. A year on, the markets have deteriorated and Rio will struggle to find buyers at a decent price. If they refuse to sell they will have to continue to operate non-core businesses. Worse still, credit-ratings agency Moody's has warned of a possible downgrade to Rio's high-investment-grade A3 rating, noting that asset sales would be a key focus of its rating review. The upshot is that Skinner will be watching his back. Rio's short-term debt refinancing includes a $US8.9 billion Tranche A Alcan loan, which is due in October. In 12 months, a $US300 million GBP bond is due, followed by a $US10 billion Tranche B Alcan loan. The breakdown of the group's net debt at October 31, 2008 was $US9.6 billion in bonds, $US29.7 billion drawn under the Alcan acquisition facility, $US1.9 billion of other debt and $US2.3 billion in cash. As Deutsche Bank's Peter O'Connor said in a recent note: "Rio has significant refinancing requirements. Rio's options in this regard may in fact be dictated by its lenders, affording Rio minimal 'wiggle room', and suggesting that share performance is likely to be constrained by either an equity issuance as part of the refinance or debt service requirements which significantly constrain free cash flow." Rio's situation has not been helped by the fall in commodity prices, which will constrain its cash flow. The company has committed to keeping its dividend at current levels, but abandoned the 20 per cent increase it promised shareholders last year. This has prompted speculation that it will launch a DRP to reduce pressure on the balance sheet. It may also follow some of the bank's lead and do an equity issue. Like a number of other companies, Rio has had to increase its pension contributions following the decline in equity markets. According to the latest Citi report, Rio's pension liability was $US1.6 billion at September 30, 2008, with assets of $US13.3 billion and liabilities of $US14.9 billion. Most of the employees in the defined benefit plans have already retired and there is not expected to be a material crystallisation of any liabilities as part of the employee reductions. According to Citi, excluding the liabilities of plans that are deliberately underfunded, the global funding level would be 9 per cent. This will mean an increase in 2009 pension contributions of about $US200 million. Rio boss Tom Albanese has a lot on his plate. Besides trying to cut a swathe through a huge debt pile, he also has to manage falling commodity prices, staff morale as 14,000 people are cut from the workforce, asset sales and the wrath of shareholders over the massive fall in its share price since BHP walked away. ---The Australian