Of Note:

Rio Tinto will look at - deferring some projects, staff reductions, cost cutting at operations, and selling assets - as it tries to cope with the combination of high debt, tight credit markets and the deep slump in demand for metals.

Rio Tinto is struggling with a $40-billion (U.S.) debt load it took on when it acquired Alcan at the peak of the commodities cycle for$38.1-billion in cash.

"They've definitely gone into survival mode"

To date, Rio has raised just US$3-billion from disposals.

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Fortunes turn for Rio Tinto

Peter Koven, Financial Post December 10, 2008

It was only a few months ago that Rio Tinto Ltd. was elated about the future of the mining sector.

When the company triumphantly released its half-year earnings in late August, it was still talking up the stunning urbanization of China and the likelihood that strong metal prices would persist through 2009. Rio felt it was in a better position than any of its competitors following its record-setting US$38-billion acquisition of Alcan Inc.

But then everything collapsed. And the company was forced to bolt into action.

London-based Rio has announced wide-ranging plans to minimize costs and cut its debt by US$10-billion by the end of next year. The initiatives include new asset sales, 14,000 job cuts, and a capital spending reduction of more than US$5-billion.

"We have been saying for a couple of months that we saw a slowing, including in China," said Dick Evans, executive director and head of Rio's Alcan unit. "Some of our competitors seem to have been in a state of denial."

Rio is in a tough position, because it is saddled with a punishing debt load of US$38.9-billion (mostly from Alcan) and has major payments due in October 2009 and 2010.

With commodity prices continuing to fall, there was a concern the situation could get worse and the company's credit ratings would get downgraded.

Rio Tinto now believes that a commodity recovery before the second half of 2009 is "highly unlikely," according to Mr. Evans.

"The problem is that we don't know for sure that [commodities] are going to recover even at that point. Particularly when you're dealing with your balance sheet, you have to consider the downside scenarios as well as the most likely case," he said.

He did not say whether Rio regrets paying an enormous premium for Alcan when commodity prices were nearing their peak. But he did point out that other companies placed similar values on Alcan, and nobody anticipated the severity of the downturn.

While Alcan sold for US$38-billion, its main competitor Alcoa Inc. is now worth just US$8-billion. Rio itself rejected an all-stock takeover offer from BHP Billiton Ltd. that was worth more than US$140-billion at one point.

Damien Hackett, a London-based analyst at Canaccord Adams, said Rio is taking exactly the actions it needs to in this environment.

"One of the problems the mining industry had in the past is marching on irrespective of the economic cycle. But Rio Tinto and BHP are very well connected to the market. They know exactly what's happening and they're acting accordingly," he said.

With Rio looking to sell more assets, the focus from investors has turned to what could be on the block.

The company said it will look to sell projects where it has joint venture partners, because they can be sold quickly with built-in buyers that will not have to do much due diligence.

One project that fits that description is the Diavik diamond mine in the Northwest Territories, which is jointly owned by Rio and Harry Winston Diamond Corp. Harry Winston shares jumped 41% Wednesday on rumours that it could buy part of Rio's 60% interest in the mine.

Rio also owns 58.7% of the Iron Ore Company of Canada, and there is speculation that some of the interest could be sold to partners Mitsubishi Corp. and the Labrador Iron Ore Royalty Income Fund.


Rio Tinto cuts 14,000 jobs

Slashes capital spending

Sonali Paul and James Regan,ReutersPublished: Wednesday, December 10, 2008

A tipper truck at a Rio Tinto mine in Australia. Rio Tinto is cutting 14,000 jobs, slashing capital spending and selling assets.

Tim Wimborne/Reuters A tipper truck at a Rio Tinto mine in Australia. Rio Tinto

is cutting14,000 jobs, slashing capital spending and selling assets.

Global miner Rio Tinto, saddled with nearly US$40-billion in net debt, said it would cut 13% of its workforce, slash capital spending and sell more assets as it battles a collapse in commodity prices.

Rio, which mines a range of metals and minerals from aluminum and copper to gold and diamonds, has been under pressure to detail plans to cut borrowings since its share price slumped after larger rival BHP Billiton scrapped a US$66-billion takeover bid for the company last month.

"What they've done has more than allayed fears in the market that they were going to come and have an equity issue," said Tim Schroeders, portfolio manager at Pengana Capital in Melbourne.

"Drastic times call for drastic measures. They've addressed all parts of the equation. They've definitely gone into survival mode, which is appropriate given the market circumstances," Schroeders said.

Rio's London shares jumped 11.3% to 1,400 pence by 9:15 a.m., outperforming a 4.2% increase in the UK mining index. Its Australian shares closed up 12% as investors had anticipated its announcement, said UBS analyst Glyn Lawcock.

The group's shares had dropped 54% in the past month, more than five times the drop in the broader market.

Rio said it would reduce its global headcount by 14,000, including nearly 6% of its own employees and more than half its contractors, and increase the range of assets it was looking to sell, but said it was too early to be specific.

"Given the difficult and uncertain economic conditions, and the unprecedented rate of deterioration of our markets, our imperative is to maximize cash generation and pay down debt," Rio Tinto's chief executive Tom Albanese said.

"We will minimize 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."


Rio said it would slash capital spending next year by more than half to US$4-billion from the previously forecast US$9-billion.

Some projects would be deferred and others canceled, with details provided at year-end results due in February.

The group also canceled plans to boost its dividend by at least 20% this year and next.

In August, as Rio was fighting off the hostile BHP bid, it raised its interim dividend by 31%, but on Wednesday it said the total 2008 dividend would remain flat at 136 cents.

Rio took on huge bank debt to fund last year's US$38-billion acquisition of Alcan, and pledged to raise US$15-billion, most of it this year, from selling non-core assets, including Alcan's packaging business and Rio's U.S. coal business.

Sliding metals prices and slowing demand have made those assets worth less, and the global financial crisis has made it tougher for potential buyers to get credit.

To date, Rio has raised just US$3-billion from disposals.

Albanese said the measures announced meant Rio Tinto would not need to sell new shares to reduce debt.

Analysts said the measures should be enough for it to meet the US$10-billion in debt reduction it has targeted.

"Even if there's some slippage in asset sales, the other measures - staff reductions, cost cutting at operations, and the dividend - will more than likely very much see them make that payment in October next year," said Pengana's Schroeders.

The cost of protecting Rio's debt fell slightly on Wednesday on the credit default swap market.

Five-year credit default swaps on Rio Tinto were bid at 950 basis points and offered at 1,150 on Wednesday, a trader said.

The mid-point of 1,050 basis points is about 40 basis points tighter than Tuesday's end-of-day price as shown by Markit data.

That means buying protection against the default of 10 million euros of the miner's debt over a five-year period would cost 1.05 million euros a year.

Asked whether it was a mistake for Rio Tinto not to have entered talks with BHP on its takeover offer, which Rio Tinto rejected outright, Albanese said: "I don't think it would have changed the outcome."


Rio Tinto targets $7-billion in spending

The Globe and Mail
December 10, 2008

More than $6.8-billion (U.S.) in Canadian spending commitments made by RioTinto PLC are being delayed or suspended as the London mining giant wrestles with the crushing debt load it took on to buy Alcan Inc.

Rio is suspending an $800-million expansion of its iron ore operations in Labrador and initiating a drastic company-wide cost-cutting plan that will see a dramatic slowdown in spending on three Canadian aluminum smelter projects in Quebec and British Columbia worth about $6-billion.

“Everything has fallen off a cliff to a degree that no one anticipated,” Rio Tinto Alcan chief executive officer Dick Evans said in an interview Wednesday.

In response to the commodities crash, which has decimated the price of aluminum and other metals, Rio is taking swift action to reduce the $39-billion in debt it shouldered to purchase Alcan last year. It is slashing 2009 capital expenditures by more than 50 per cent, putting key assets up for sale and cutting 14,000 jobs. Rio hasn't identified where the job cuts will come from, but the company's Canadian operations, including the Alcan aluminum smelters, are all but certain to be affected.

“I'm sure we will have some reductions enforced in Canada but we expect to keep the employment level commitments that we made [to the government],” Mr. Evans said.

Rio is the latest international mining powerhouse forced to cut operations in Canada.

Anglo-Swiss miner Xstrata PLC is closing two nickel mines in Sudbury that were once owned by Canadian miner Falconbridge, and asking 250 workers to accept early retirement packages. Brazil's Companhia Vale do Rio Doce (Vale) is closing the Copper Cliff South mine in Sudbury, which was once owned by Canada's Inco. Vale also delayed some Sudbury development projects and offered employees early retirement packages. In order to win Investment Canada approval for the takeovers, which were worth $40-billion (Canadian) combined, Xstrata and Vale promised to not lay off workers for at least three years.

Rio Tinto also made a slew of commitments to win approval from Ottawa and Quebec for its $38.1-billion (U.S.) all-cash bid for Alcan, which gave it smelters in Quebec and B.C. and access to cheap Canadian hydro (electricity accounts for more than a third of the cost of producing aluminum).

The promises included minimum employment levels in Quebec and Canada, establishing Rio's aluminum division head office in Montreal and committing to two major projects: a state-of-the-art smelter, dubbed the AP50, in the Saguenay region of Quebec and the upgrade of Alcan's smelting operations in Kitimat, B.C.

The smelter projects, which will cost a combined $5-billion (Canadian) to build, have not been cancelled, but will be delayed in light of Rio's cash crunch.

“We will slow down the rate of spend on Kitimat and AP50,” Mr. Evans said. The company has also suspended plans for a $1-billion expansion of its Alma smelter.

“There are all sorts of catastrophic scenarios running through our heads,” said Alain Gagnon, president of the Syndicat National des Employés de l'Aluminium d'Arvida, which represents about 2,000 Alcan employees at its Jonquière and Laterrière smelters. “With Alcan's energy agreements [with the Quebec government] we shouldn't be as affected as much as others, but there is nothing in the agreements that prevents Alcan from reducing the work force.”

Rio is cutting back drastically in other areas of Canada, too. An $800-million (U.S.) expansion of its iron ore operations in Labrador, which was trumpeted by the company this March as part of its commitment to the country, has been “suspended,” Iron Ore Co. of Canada (IOC) spokesman Michel Filion said Wednesday.

Rio Tinto had planned to sell Alcan's engineered products and packaging divisions to help pay for the takeover but the global credit crunch has culled the list of potential buyers. Rio is now putting other “significant” assets up for sale to reduce debt.

Mr. Evans said it was “highly unlikely” that low-cost smelters and hydro assets in Quebec and B.C. would be sold but said other Alcan assets could be auctioned off.

Damien Hackett, an analyst with Canaccord Adams in London, suggested that Rio could sell its interest in IOC. “They've always been less than 100 per cent committed to IOC,” Mr. Hackett said in an interview.

The analyst also believes Rio might unload its stake in the Grasberg mine in Indonesia, most likely to its joint venture partner Freeport-McMoRan Copper & Gold Inc.

Others pointed to Rio's 60-per-cent interest in the Diavik diamond mine in the Northwest Territories as a potential asset sale. Shares of Harry Winston Diamond Corp., which have lost about 85 per cent this year, jumped 41 per cent Wednesday on speculation that a buyer for Rio's interest in the mine would also want Harry Winston's stake.


Rio Tinto chief executive Tom Albanese

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