Responding to the Four-Letter Word… Debt

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Commodities

As Lisa noted this morning, Rio Tinto is resorting to drastic measures to decrease the company’s $39 billion debt: not just cutting 14,000 jobs, but also dropping projects and selling assets. This poses quite the contrast from earlier this year, when Rio Tinto leaders insisted the company was too strong and worth too much to consider advances from mining rival BHP Billiton. Maybe Rio Tino leaders, alongside steelmakers, were a little too insistent; BHP Billiton dropped their hostile bid for the company last month.

“The economic environment is now much worse than we could have anticipated in October,” Tom Albanese, Rio Tino chief executive, explained this Wednesday.

“Our investors at this time are most interested in what we are going to do on debt reduction,” Albanese added to the Financial Times, announcing that the company plans to create $5 billion worth of cuts in capital expenditures.

To complete this task, Rio Tinto has proposed cutting 2009 capital expenditures more than 50 percent and selling central assets. For example, there is speculation about Rio Tinto selling their 60 percent interest in the Diavik diamond mine, their stake in the Grasberg mine in Indonesia, and, they still hope, Alcan’s engineered products and packaging divisions; ironic, since the Alcan purchase led to this debt. Although recent commodities crashes hurt the possibility of an Alcan sale, Rio Tinto has another trick up their sleeve. The company recently announced plans to suspend an $800 million mining expansion project through subsidiary Iron Ore Co. in Canada; putting the plans on an indefinite hold.

Shocking, but true, more help could possibly come from a surprise company: BHP Billiton, despite the lingering stress of their year-long proposed takeover. “One obvious way for Rio to raise cash would be to sell its 30 percent stake in the Escondida mine in Chile, one of the world’s largest copper producers,” Jeremy Gray at Credit Suisse was paraphrased in a recent article. “BHP operates the huge mine, owns a 57.5 percent stake, and has pre-emption rights over Rio’s stake … Selling the 30 percent Escondida stake could raise $6 [billion for Rio Tinto.]”

Avoiding that idea for the time being, Albanese hopes recent stimulus packages in China will have an addition impact on business. He notes, however, “the US recession is more negative than we thought two months ago, and is having an increased effect on Chinese exports and therefore Chinese metals demand.”

Despite the occasional setback, recent debt-decreasing plans have soothed investors and made an impression on company shares. Yesterday, London-traded shares for Rio Tinto rose 20 percent.

–Amy Edwards

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