Could III be courted sooner than later?
bloomberg.com
May 12 (Bloomberg) -- Rio Tinto Groupspent 2008 trying to sell assets as it strained to cut ballooning debt. Chief Executive Officer Tom Albanese now has the opposite challenge -- to decide how to spend his swelling pile of cash.
Rio, the world’s third-largest mining company, will have $24.5 billion in cash next year, according to the median of nine analyst estimates compiled by Bloomberg News. That compares with $42 billion ofdebt the London and Sydney-traded company had after the 2007 takeover of aluminum maker Alcan Inc.
The shift in fortunes, driven by asset sales and surging commodity prices, may spur Albanese, 52, to make a major acquisition for the first time since Alcan almost three years ago. Rio has “firmly re-instated” takeovers as a growth option and won’t be discouraged by Australia’s planned tax on mining company profits, according to JPMorgan Chase & Co.
“What we do want to see them do is buy into world-class assets,” Saxon Nicholls, who manages the equivalent of $930 million, including Rio shares, at Herschel Asset Management Ltd. in Melbourne. “They can buy assets anywhere in the world.”
Rio, which may cut its net debt to $4.1 billion this year, according to HSBC Holdings Plc, fell 0.8 percent to 3,270 pence by 10:58 a.m. in London trading. The shares have dropped 3.6 percent this year, compared with a 5.4 percent decline in the Bloomberg World Mining Index.
The value of mining mergers and acquisitions may more than double this year to about $175 billion, snapping a two-year decline, according to Ernst & Young LLP. Mining companies may have $91.3 billion of surplus cash, after capital expenditure and dividends, by 2012, Citigroup Inc. said in March.
M&A Agenda
Surging commodity prices, $10 billion in asset sales and a $15.2 billion share sale in 2009 will see Rio move from having $18.9 billion net debt at the end of 2009 to $18.5 billion net cash by end of next year, according to JPMorgan Chase.
Rio Chief Financial Officer Guy Elliott said in February the company was looking for “bolt-on or early stage projects” and Albanese signaled at last month’s annual meeting that acquisitions were on the agenda.
Faeth Birch, a London-based spokeswoman for Rio, said the company couldn’t comment further than statements made by the executives.
Rio may seek copper mines to boost production, according to Nomura Holdings Inc., as its next major copper project, the $4 billion Oyu Tolgoi deposit in Mongolia, isn’t scheduled to start production until 2013.
No Growth in Copper
Newcrest Mining Ltd., Australia’s biggest gold producer which gets about a quarter of its sales from copper, and Fortescue Metals Group Ltd. are two possible targets, JPMorgan analysts including David George said in an April 19 report. Rio would need to move before Newcrest’s takeover of Lihir Gold Ltd. is voted on by shareholders in late July, the bank said.
“They will undoubtedly be revisiting M&A,” said Paul Cliff, a Nomura analyst in London, who has a “buy” rating on Rio and wants it to expand its iron ore and copper mines.
“They basically have got no growth in copper production in the next three years so that’s a gap they could seek to fill through M&A,” Cliff said. “Increasingly the miners are going to have to be looking at central Africa.”
Australia’s government last week unveiled plans for a 40 percent “super tax” on mining company profits from 2012. Xstrata Plc, the world’s biggest producer of power station coal, said the proposal will have a “serious impact” on the nation’s mining industry, including mergers and acquisitions.
Stymie Investment
“For good reason, people are beginning to use the terms nationalization and expropriation” to describe the government proposals, Albanese said yesterday at a conference in Miami. “This will not help Australia’s future investment climate.”
Peabody Energy Corp. this week cut its takeover offer for Macarthur Coal Ltd. to A$3.8 billion ($3.4 billion), citing the tax as a reason, while BHP Billiton Ltd. Chief Executive Officer Marius Kloppers said the tax may stymie investment and make foreign projects more attractive.
“The big cashed-up guys will shift the weight of their investments over the medium term away from Australia, both organic and M&A,” said JPMorgan’s George. “The right opportunity in M&A is still attractive for Rio.”
Since the Alcan purchase, Albanese was forced to write down the value of the aluminum unit by $7.9 billion in 2008 after the global economic crisis froze money markets and crimped metal prices. He also fended off a hostile $66 billion bid from BHP and scrapped a $19.5 billion investment deal with his biggest shareholder Aluminum Corp. of China.
‘Dramatic Turnaround’
“They’ve gone from a situation where they were just focused entirely on managing their debt position to now where they can probably contemplate different growth options,” said Andrew Keen, head of metals and mining research at HSBC in London. “It’s a pretty dramatic turnaround.”
Rio, the world’s second-largest iron ore exporter, may more than double profit to $12.7 billion in 2010, according to the average estimate of 16 analysts compiled by Bloomberg, boosted by surging prices for the material. Rio plans to spend at least $5 billion this year on projects, Albanese said in March.
“I would rather they develop projects from the ground up from their portfolio,” saidIan Henderson, who oversees $6.5 billion at JPMorgan Chase in London and counts Rio as his biggest holding. “Companies that generate their own new projects generally add more value then companies that buy new projects.”
Target Rio?
It’s not just Albanese who’s overseeing surging cash flows, so are his rivals and that may make Rio itself a target. BHP, Xstrata, and Anglo American Plc will produce combined operating cash flow of $56 billion in 2011, according to an April 19 report from HSBC.
The possible collapse of Rio’s proposed iron ore joint venture with BHP in Australia could prompt a fresh takeover from the world’s biggest mining company, HSBC said. “Rio is now a more attractive proposition with less debt and less downstream aluminum assets,” HSBC’s Keen said last month.
“They will seek to do a number of smaller deals, perhaps joint ventures,” saidPeter Chilton, who holds Rio shares at Constellation Capital Management Ltd. in Sydney, and prefers Rio to look at buying closely held companies. “They can’t afford to make another mistake on a large acquisition.” |
