More misery for shareholders in Rio Tinto on Wednesday. The shares were off a further 89p to £11.82 – their lowest level since April 2004 – as speculation of a rights issue continued to swirl round the London market.
These rumours have circulated since BHP Billiton effectively pulled the plug on its $62bn offer by announcing that it would not offer assets disposals or structural remedies to secure EU merger clearance for the proposed deal.
To be clear, Rio is telling anyone who will listen that it does not need to raise capital and that it will be able to meet a $8.9bn debt repayment due Sept 09 through a mixture of free cash flow and existing bank facilities. But the market appears to be in no mood to listen.
And that’s not surprising. After all, Rio is not well positioned for an economic slowdown – its commodity exposure it dominated by iron ore, aluminium and copper. All of which makes things very tricky when you are carrying net $42bn of debt.
As mentioned earlier, the critical component of Rio’s debt is the $9bn of debt which is due to mature next September. But even if this hurdle is cleared, market attention will simply shift to the $10bn maturing in October 2010.
From a Citigroup note on Wednesday:
Citi has also attempted to stress test Rio’s balance sheet. Analysts believe that under a “bear scenario” for commodities – copper at 89 cents/lb in 2009 and aluminium at 130 cents/lb – Rio would be cash flow negative for the next couple of years.
Rio Tinto would have negative cash flow in for the next few years under our downside case, which would require the company to draw down debt
To maintain positive funding the company would have to cut capex in the order of $4bn. This analysis excludes the $9bn of debt which is due to mature in September 2009.
In the advent that Rio Tinto cannot sell any assets and cannot roll the debt — the company would end having to cutting all of its project capex and dividends but this still leave a hole of around $3bn.
Oddly, Citi has a buy rating on Rio and a £26.90 price target. It says the company has enough levers to pull – i.e. it could significantly reign in project capex and sell assets. Of course, that is easier said than done in the current environment.
Rio originally planed to sell $15bn of assets following the acquisition of Alcan, the Canadian aluminium company. So far it has only offloaded $3bn.
On top of all that, there is a chance that Rio will be forced to take impairment charges of up $10bn against Alcan assets should the forward aluminium prices not improve.
Related link:
Rio defiant on debt position – FT.com
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