Rio Tinto mulls multibillion infusion from Chinalco; $6 billion issue

The world's third largest diversified mining company, Rio Tinto, which is considering a range of options to reduce its massive debt by $10 billion from $39 billion in the current year, is seeking a multibillion dollar capital injection from Chinese aluminium maker Chinalco, assets sale to sovereign wealth funds and Chinalco and if both fail, then a $6-billion equity issue. After having said late last year that it would not go the equity sale route to lighten its debt with chief executive Tom Albanese reiterating two weeks back that the company was not considering one as it was not needed under current economic conditions, the London-based miner yesterday backtracked saying that an equity issue was one among the many options under consideration. The stock exchange had requested Rio Tinto to respond to market rumours of a likely equity raising, which Rio admitted was an option. "In order to preserve maximum flexibility for the group, the boards do not rule out the potential to issue equity as one of the options it has available, if it is determined to be in the best interest of shareholders," the miner said in a statement. The statement further said that "No decision on which options will be pursued has yet been taken, and further announcements will be made as and when appropriate." Some important shareholders in Rio have threatened to remove the entire management team, if the miner goes in for an equity issue. Rio Tinto is also rumoured to be holding talks with its major shareholder, the Chinese state-owned metal company Chinalco about a possible multibillion dollar capital infusion and sale of certain assets to Chinalco and other sovereign wealth funds and going in for the equity issue if both these options do not materialise. But trying to sell some of its strategically important companies that hold some of the best reserves in the world in iron ore, coal and aluminium to any Chinese company or Chinalco, which already has a 9-per cent stake in Rio, will invite controversy as the Australian government may not allow the sale to go through. Last month Rio held talks with its bankers to refinance its first debt repayment of $8.9 billion due in October 2009, and another $10 billion due in October 2010. Even though it has undrawn facilities of $4.6 billion, Rio still needs a rights issue or some big asset sale before October. Some analysts believe that Rio Tinto can still meet its October debt obligations without resorting to raising an equity issue but it could restore the market's confidence in the miner, if it did not have to part with some of its prized assets. Other miners who have resorted to raising capital are Alcoa and Freeport McMoran. Xstrata may have to follow soon. Rio has announced plans to axe over 14,000 jobs globally and slash $5 billion in spending and increase asset sales as part of an aggressive cost cutting campaign to reduce its debt by $10 billion by the end of 2009. Much of its debt that stood at $42 billion last year was on account of its acquisition of Canadian aluminium producer Alcan in July 2007 for $38 billion. Last month the miner said that it would sell some of its assets to reduce its debt burden although it did not spell out which assets it is likely to put up for sale, analysts believe that most of the fire sale of assets will come from the under performed businesses of Rio Tinto Alcan's aluminium business in North America. It had previously flagged the sale of Alcan's packaging business, engineered products operations, US coal business, the Northparkes copper-gold mine in NSW and the Sweetwater uranium mill in the US. Rio has sold its 40-per cent stake in the Cortez gold mine in Nevada for $1.7 billion in February, its 70-per cent stake in Greens Creek base metal mine in Alaska for $750 million and its 70 per cent stake in the Kintyre uranium project for A$346.5 million. --domain-B