Rio Tinto Retreats From Aluminum, $8 Billion Assets on Block

 Global miner Rio Tinto signaled a major retreat from its Aluminum business on Monday, putting an estimated $8 billion worth of assets up for sale across six countries, only four years after buying Aluminum giant Alcan for $38 billion.

 

Rio Tinto[RIO  55.48     1.07  (+1.97%)   ] said it planned to sell 13 assets, including smelters and alumina refineries, in a move immediately interpreted as a way of diverting yet more resources to iron ore, which now accounts for nearly 80 percent of group earnings.

 

 

"It's all about returns and these big miners, Rio included, are always re-evaluating their businesses. And iron ore is currently a real cash cow for Rio Tinto," said Gavin Wendt, senior mining analyst for Mine Life in Sydney.

 

 

The sale, which would leave Rio Tinto's remaining Aluminum business focused mainly on its more profitable Canadian operations, is designed to help the group more than double its Aluminum earnings margins to 40 percent by 2015.

 

 

"The only way they can achieve that is by getting rid of all these assets which can never be world class," said Peter Chilton, resources analyst at Constellation Capital Management.

 

 

Rio Tinto's shares jumped 3 percent to a month high of A$70.29 on the news, with fund managers applauding the move away from a poorly performing business with a gloomy outlook compared with its iron ore unit, which enjoys a 70 percent profit margin.

 

 

Rio Tinto has been in Aluminum since the 1950s and ranks itself as the world's largest primary producer after the ill-timed Alcan deal in 2007, but it could no longer ignore the business's big hunger for capital and relatively meager returns.

 

 

'No Rush to sell'

 

 

Rio Tinto was careful not to appear overly keen to sell and made it clear that Aluminum remained a core asset, saying global demand was relatively good and that it would consider making further investments in quality Aluminum assets.

 

 

"We're going to be in no rush (to sell)," Rio Tinto Alcan Chief Executive Jacynthe Cote told reporters in a phone briefing after the announcement. She declined to say whether Rio Tinto was already in talks with potential buyers.

 

 

The company said it would look at a range of options for divesting the assets, which could include floating them as a separately listed company, spinning off shares in a new company to Rio Tinto shareholders or finding buyers for the assets.

 

 

"It's a well thought-out plan to realize value that might not be recognized in the current Rio share price and should deliver benefits to shareholders in the medium to longer term," said James Bruce, a portfolio manager at Perpetual.

 

 

Industry analysts said smaller buyers were more likely to be interested in these assets than major producers such as Russia's UC RUSAL [0486.HK  6.18     0.13  (+2.15%)   ] or Chinese state-owned Chinalco. Like Rio Tinto, the big producers are all chasing higher-return assets.

 

 

Aluminum prices have tumbled nearly 15 percent in the past quarter. UBS rates Aluminum as a "least preferred" commodity and sees prices falling another 8 percent in 2012.

 

 

Rising Chinese Aluminum output has been undermining global prices for the metal. "The aluminum industry has been suffering because of over-capacity coming from China," said Henry Liu, of Mirae Asset Securities in Hong Kong. "This has led to very thin margins. It's very difficult to compete with Chinese producers."

 

 

Rio Tinto said it would sell assets in Australia, New Zealand, France, Germany, the United States and Britain to focus on its hydro-powered plants in Canada. It also planned to keep its Weipa bauxite mine in Australia.

 

 

Bauxite is used to make alumina which is in turn used to make Aluminum, a light-weight and flexible metal used in a vast array of industrial and consumer products, from packaging and aircraft manufacturing to electrical cables and insulation.

 

 

The group said a new unit, Pacific Aluminum, would hold the six Australian and New Zealand units being put up for sale, including Australia's Gove bauxite mine and alumina refinery and Tomago smelter and its New Zealand smelters.

 

 

Deutsche Bank analysts estimated the Pacific Aluminum assets were worth $6.5 billion, though some others doubted this, citing uncertainty over Australia's planned carbon tax. The tax will raise power prices for energy-hungry Aluminum smelters.

 

 

Rio Tinto's plants in France, Germany, the United States and Britain that would be put up for sale would continue to be managed by Canada-based Rio Tinto Alcan.

 

 

In 2011, Rio Tinto forecasts its share of bauxite, alumina and Aluminum production to be 35.8 million tons, 9.2 million tons and 3.9 million tons, respectively.