Rio May Sell ERA, Coal Unit to Cut Debt, Merrill Says

By Rebecca Keenan

Dec. 11 (Bloomberg) -- Rio Tinto Group, the world’s third largest mining company, may sell its majority stakes in either Energy Resources of Australia Ltd. or Coal & Allied Industries Ltd. to help repay debt, said Merrill Lynch & Co.

The company may also divest its stake in the Grasberg copper mine in Indonesia to a Chinese company or seek an equity investment in its iron ore unit, Merrill Lynch analysts Vicky Binns and Jason Fairclough said in a report dated yesterday.

Rio Tinto shares jumped 20 percent in London yesterday and as much as 11 percent in Sydney after the company said it will eliminate 14,000 jobs, reduce capital spending by more than half and sell mines to reduce net debt by $10 billion by the end of next year as demand for metals sinks. Talks to either sell assets or bring in joint venture partners have started, the company said.

“The market will perceive the announced plan as credible while still holding some doubt as to whether the initiatives will be enough if the market continues to be moribund for the next one to two years,” said Merrill’s Binns. She’s raised her rating on Rio to “buy” from “underperform” because of the ‘extreme underperformance’ of the company’s shares.

Rio Tinto rose 7 percent to A$40.00 at the 4:10 p.m. Sydney time close on the Australian stock exchange, taking its market value to about $34 billion compared with $38.9 billion of debt.

Rio has declined 37 percent since BHP Billiton Ltd. scrapped its hostile takeover bid on Nov. 25, citing global turmoil, slumping demand for metals and Rio’s high level of debt.

Likely Assets

Rio’s 68 percent of Energy Resources, supplier of more than a tenth of the world’s mined uranium, may be worth as much as $2 billion, Merrill said. Its 75 percent holding in Coal & Allied, an Australian coal producer, could worth $4 billion to $5.5 billion, according to Merrill.

Grasberg, the world’s second-biggest copper and gold mine, is managed by Freeport-McMoRan Copper & Gold Inc.

Rio has already made divestments this year, selling its 40 percent stake in the Cortez gold mine in Nevada for $1.7 billion in February to Barrick Gold Corp., its 70 percent stake in Greens Creek base metal mine in Alaska for $750 million to Hecla Mining Co. in February and its 70 percent stake in the Kintyre uranium project for A$346.5 million to Cameco Corp. and Mitsubishi Development Pty.

Rio may sell a 15 percent stake in the Hamersley iron ore unit for $3 billion, Binns said. The unit produces about 120 million metric tons a year. The company may be forced to raise cash through a share sale if it doesn’t sell enough assets and if the market doesn’t improve by the middle of next year, Binns said.

“If assets sales are hard to push through and commodity markets are not improved from current spot levels, then on our forecasts, an equity issue appears unavoidable,” she said. It could need to raise between $8 billion and $10 billion, she said.

Albanese said yesterday Rio won’t sell shares and abandoned a plan to raise dividends in an effort to reduce debt.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net