It had to happen — ever since BHP Billiton pulled the plug last month on the world’s biggest hostile mining takeover, Rio Tinto has been on borrowed time. On Wednesday, the world’s third largest miner announced a radical restructuring — including the loss of 14,000 jobs and a $5bn cut in capital expenditure — in an effort to reduce its $39bn debt pile in the face of deteriorating commodity prices.
As the FT reports, Rio said in a Wednesday statement that it will also hold its 2008 dividend at the 2007 level of $1.36 and widen its search for assets that can be sold to raise cash. Rio said it planned to cut debt, which stood at $38.9bn at the end of October, to $28.9bn by the end of next year.
The group’s indebted balance sheet has come under the spotlight from analysts and ratings agencies in the weeks since BHP abandoned its $66bn hostile takeover attempt. Its shares have also also fallen by close to 40 per cent since BHP walked away on November 25.
Rio said it was reacting to the “unprecedented rapidity and severity of the global economic downturn, which has caused sharp falls in commodity prices and a significantly weaker outlook” and noted the economic outlook had worsened since its Q3 operations review on October 15, prompting a reorientation of priorities to conserve cash flow and reduce near-term borrowings. Under its cost-cutting plans, the group will reduce its global headcount by 14,000, including 8,500 contractors and 5,500 employees, with an annual saving in operating costs of $1.2bn.
Tom Albanese, chief executive, had this to say on Wednesday: “Given the difficult and uncertain economic conditions, and the unprecedented rate of deterioration of our markets, our imperative is to maximise cash generation and pay down debt”.
“We will minimise our operating and capital costs to appropriately low levels until we see credible and meaningful signs of a recovery in our markets, but will retain our strategic growth options. We will expand further the scope of assets we are targeting for divestment. By taking these tough decisions now we will be well positioned when the recovery comes.”
He also brought relief to worried investors by ruling out any need for an equity raising. “We have no current need to raise equity and recognise that we have quite a number of operating and capital and other levers which we have announced today,” he said.
Albanese said he had the full support of the board and that Paul Skinner, chairman, had been actively engaged in the decisions taken to improve the business.
A bit early for results from what was shaping up to be a difficult analysts’ call with Rio on Wednesday morning (our Markets Live team will give their take on it all shortly), but some investors had this to say about Rio’s move:
“What they’ve done is more than allayed fears of the market they were going to come and have an equity issue. Drastic times call for drastic measures,” Pengana Capital portfolio manager Tim Schroeders told BusinessSpectator. “They’ve addressed all parts of the equation they’ve definitely gone into survival mode, which is appropriate given the market circumstances.”
However, Schroeders warned, selling assets would be difficult in the current environment.
ANZ Banking Group senior commodities analyst Mark Pervan told BusinessSpectator that Rio was likely to hold onto so-called Tier 1 assets such as copper, iron ore and coal, but industrial metals could feature in the asset sales.
“This will appease shareholders and the market, where there was huge concern about cash flow and debt levels. They could be looking at including industrial minerals into the asset sales, but will hold onto their tier one assets in copper, iron ore and coal,” Pervan said.
“They may make haircuts there too in where they have joint ventures — maybe the Grasberg copper mine in Indonesia. The cut in iron ore output will mean people will be trimming medium-term supply forecasts, but I doubt we will see an immediate impact in prices.”
But the most palpable sign of investor relief that Rio was addressing some of the hard issues without going to the market: the group’s shares closed 12.14 per cent higher at A$37.36 and were up 11 per cent in European trading.
Related Links:
So long, super-cycle - FT.com
Rio’s Dec 10 investor presentation – Rio Tinto