analysts back rio tinto s tough measures

Rebecca Le May
December 11, 2008 - 4:49PM
Rio Tinto Ltd's decision to slash jobs, spending and costs has been applauded by market analysts and pushed up the mining giant's share price.

The analysts say Rio shareholders have embraced the cuts because it means the company will not need to raise equity while global credit markets are frozen.

Analysts are divided over the assets that Rio Tinto will choose to sell under an expanded asset sales program, but say this measure will bolster the miner's ability to service $US38.9 billion ($A59 billion) of net debt.

Rio Tinto's shares surged more than 10 per cent at the start of trade on Thursday in response to the news and closed $2.60, or 6.95 per cent, higher at $40.00.

Rio Tinto workers worldwide must now endure weeks of uncertainty while they wait for the company to provide details on where 14,000 jobs will be cut.

But analysts say the tough measures are needed, because Rio Tinto's bottom line is being pummelled by plunging prices for virtually all of the commodities it sells amid the global economic crisis.

DJ Carmichael resource analyst James Wilson said Rio Tinto's trimming of fat was "very smart" but, in hindsight, its $US38 billion ($A57.6 billion) acquisition of US aluminium producer Alcan last year was a bad move.

Mr Wilson said Rio Tinto bought the company near the top of the market, when aluminium was trading at about $US2,800 per tonne, compared to its current price of about $US1,500 a tonne.

"Everybody was paying too much at the time (of the Alcan acquisition in November last year)," Mr Wilson said.

"No-one could have predicted what was going to happen to the market.

"It says something about growing too fast.

"But they (Rio) are not going back to the market (to raise funds) and as a shareholder you'd be very happy."

But IG Markets research analyst Ben Potter said it was a real concern to analysts and investors that Rio Tinto sought to maintain its current dividend payout ratio.

Mr Wilson said it was a smart move by Rio Tinto to delay the multi-billion-dollar Simandou iron ore project in Guinea.

UBS Investment Research said Rio Tinto appeared to not be receiving high enough offers for the non-core assets it had previously targeted for sale.

So potential disposals now could include core assets that may be more attractive to potential buyers.

"This may include bulk commodities and a possible buyer is Chinese interests, in our opinion," UBS said in a research note.

UBS expects Rio Tinto will sell part of its Gove or Yarwun alumina refineries in the Northern Territory and Queensland respectively.

The broker said it could also sell its 68 per cent stake in uranium miner Energy Resources of Australia Ltd (ERA).

"The ERA stake is worth $US1.5 billion ($A2.27 billion) at current market prices," it said.

"A sale would also free up an additional $A88 million that Rio has provided as a financing facility to ERA."

UBS said a sell-down of all or part of Rio's 69 per cent stake in the Rossing uranium project in Namibia to an existing or new joint venture partner "may realise acceptable value".

"We value Rio Tinto's Rossing stake at $US815 million ($A1.2 billion)."

Citi agreed that Rio Tinto might seek to divest its uranium assets, along with its Australian coal assets and non-core copper mines if buyers could be found.

Both Citi and Goldman Sachs JBWere said it was a concern that project cuts or delays could mean that the mining giant misses out on growth opportunities when markets turn.