Rio Tinto says taking tough medicine to prepare for recovery

By a staff reporter, with Reuters Rio Tinto Ltd boss Tom Albanese says the mining giant is taking tough action so it will remain strong during the downturn and be ready to grow when a recovery takes place, as the company's shares dropped more than three per cent on concerns about lower iron ore prices and the fate of the $US19.5 billion ($A27.14 billion) deal with China's Chinalco. "By making difficult decisions on cash conservation, debt repayment, capital expenditures, asset sales and employee reductions, we are creating the certainty that we remain a strong company during the current global downturn, and will be ready to grow again when there are meaningful signs of recovery," Mr Albanese told the company's annual general meeting in Sydney. "I am convinced that we are making the right choices for long term value creation in terms of our strategy. Going forward, my focus will be on safety, completing and integrating the Chinalco transaction, and settling the business after a very public and difficult year for us all." During the meeting, outgoing chairman Paul Skinner defended the board's decision to ward off a 3.4-for-one share offer from BHP Billiton last year, telling shareholders the offer never recognised Rio's value. "We now live in a world in a different state," he told angry shareholders. "The Chinalco proposition is the best value proposition available to Rio Tinto today." "I think potentially we are on the threshold of an exciting new partnership," Mr Skinner said. A recent report on broadcaster CNBC also speculated that rival BHP Billiton had held informal talks with Rio Tinto at the weekend, but fund managers said this was not the main reason behind the fall in Rio's share price on Monday. BHP Billiton has refused to comment on the rumour. The speculation has been swirling for several weeks, sparked by questions on whether the Chinalco deal would go ahead in the face of political concerns about Australian resource assets falling into the hands of the Chinese state. "They are always talking, but I wouldn't call the talks 'formal'," an investment banker with direct knowledge of the Chinalco-Rio deal told Reuters. "I'm sure they're in constant talks," Don Williams, chief investment officer at Platypus Asset Management, said of BHP and Rio. Fund manager Tim Schroeders of Pengana Capital put a low probability on BHP doing anything with Rio in the next 12-18 months, saying conditions had not changed enough since it pulled its bid last November blaming weak commodity markets, Rio's debt and its inability to sell off assets. Any talks now would have to focus on specific assets, or possibly a rights offer, as under UK takeover regulations BHP cannot revive a full takeover bid until November. Rio Tinto shares ended the day 2.06 per cent lower to close at $57.90, having reached as low as $56.50, while BHP's shares closed down 1.58 per cent at $32.88, helping to drag the broader market down 0.2 per cent. Jamie Spiteri, senior dealer at Shaw Stockbroking, said Rio and BHP were likely hurt by uncertainty on iron ore negotiations with Asian steelmakers. Steel mills want a quick settlement with a steep cut in annual prices, but the miners are holding out amid signs of an economic recovery. "There was some press this morning that the iron ore negotiations may get stretched out longer than anticipated and therefore that would be providing a level of uncertainty, which is probably not going to work favourably for the producer in the short term," Mr Spiteri said. New opportunities Mr Albanese also said the $US19.5 billion deal with Chinese aluminium giant Chinalco would create opportunities for new projects and joint ventures in emerging economies. The deal would give China's top aluminium maker $US12.3 billion worth of stakes in Rio's iron ore, copper and aluminium assets and $US7.2 billion worth of convertible debt that could double its stake in the group to 18 per cent. "The transaction will position Rio Tinto at the forefront of industry trends involving China and the developing world. It creates the opportunity for joint ventures and project development in emerging economies," he said. "In partnership with Chinalco, it opens the door to China for our Exploration teams; and the relationship will bring access to Chinese financial institutions for project development funding." He said the deal would give the company much greater protection against any further possible downside risk in the global economy, by providing two major debt repayments over the next two years, offering substantial premiums for the company's assets, and the bonds being proposed had a conversion price at a premium well above Rio Tinto's current share price. Outgoing chairman Paul Skinner told shareholders they all stood to benefit from the proposed deal, which he said reflected the growing importance of China to the global economy. Alcan regrets Mr Skinner repeated the acknowledgement made for the first time at the company's annual general meeting in London last week that the company's acquisition of Canadian aluminium producer, Alcan, in 2007 had been the source of the financial difficulties currently facing the company. "With the benefit of hindsight, it is clear that the acquisition was made when aluminium prices were higher than at present," he told the meeting. But he said the assets had only become available at the time because after the hostile bid made for Alcan by Alcoa. "We believe it was a rational decision, based on value, and on our knowledge of prevailing circumstances at that time. It had the full support of the board and of 97 per cent of Rio Tinto shareholders," he said. "The subsequent onset of the financial crisis and the virtual freezing of debt markets made it difficult for us to sell at appropriate values the downstream parts of Alcan that did not fit our strategy. We certainly regret that we were unable to complete this aspect of the Alcan transaction in a timely way." Mr Skinner, who is due to be replaced by Jan du Plessis, said the Alcan business still held long-term and strategic value. "Difficult as market conditions in the aluminium industry are at the moment, we are performing better than our competition, thanks to the quality of our assets," Mr Skinner said. "When the recovery in aluminium prices comes about, we believe that the real strengths and value creating potential of the business will become apparent. Mr Skinner said the long-term outlook of the resources giant had not changed and China would remain the primary driver of growth in demand for commodities, predicting that investment in China would start to gain strength later this year following the government's spending on transport, infrastructure and housing. "When global economic activity recovers – and predicting the timing is very difficult – we could see metals and minerals demand pick up quite rapidly, driven by the requirement to rebuild stocks and make up the backlog of development projects slowed by the recession," he said. "Based on underlying trends of urbanisation and industrialisation across a very large population, we believe the fundamentals of the Chinese economy, and other fast growing markets like India, remain intact, and that our industry’s long term prospects remain very positive." Mr Skinner said any synchronised global recovery was not likely for at least 12 to 18 months, however. "Since the fourth quarter of last year we have taken decisive measures to counter the downturn and conserve cash flow, while keeping open our considerable options for growth when meaningful recovery in demand occurs," he said. "We do not know how long the downturn will last, but, thanks to our people and assets, we will remain ideally placed to benefit from the upturn when it comes, especially with the proposed strengthening from Chinalco." BAT resignation in due course Meanwhile, new chairman Jan du Plessis said on Monday he planned to resign from British American Tobacco "in due course" to concentrate on his role at Rio. Mr Du Plessis has been chairman of BAT since 2004.