Rio Tinto sells more assets, confirms talks with Chinalco

Rio Tinto (RTP-n, RIO-l) continues to hack away at its immense debt load with sales to Vale (RIO-n) of its undeveloped potash assets in Argentina and Canada and an iron ore mine in Brazil for a total of US$1.6 billion.

The Anglo-Australian giant announced the sale agreement on Jan. 30, the same day it confirmed speculation that it had held talks with China’s aluminum producer Chinalco to sell the state-owned company minority interests in some of the group’s operating businesses, as well as possibly investing in convertible instruments.

The moves are part of Rio Tinto’s plan to slash US$10 billion from its US$37 billion debt burden by the end of 2009.

Under its agreement with Vale, Rio Tinto will sell its potash assets including Potasio Rio Colorado, Argentina’s first potash project, and Regina Potash, a large 1,200 sq. km property in Saskatchewan.

Rio Tinto will also hand over Corumba, an open-pit iron ore mine in western Brazil. (The iron ore mine contributed earnings of US$6 million in the first six months of 2008 and US$12 million for all of 2007.)

“This is a very positive step towards meeting our commitment to reduce debt by US$10 billion in 2009,” Rio Tinto’s chief financial officer, Gary Elliot, said in a prepared statement. The deal follows the sale in January of Rio Tinto’s interest in China’s Ningxia aluminum smelter for US$125 million.

Last year asset sales netted the company nearly US$3 billion including the sale of its Greens Creek mine in Alaska (US$750 million); its interest in the Cortez mine in Nevada (US$1.69 billion) and the Kintyre uranium project in Western Australia (US$495 million.)

Rio Tinto has also confirmed that it has held talks with Chinese state-owned aluminum producer Chinalco.

Last year Chinalco, acting with Alcoa, bought 12% of Rio Tinto’s London-listed shares for $14 billion. The transaction gave Chinalco and Alcoa a 9% stake in the group.

Chinalco may decide to increase its stake given China’s appetite for the natural resources Rio Tinto has in its worldwide stable of properties. Rio Tinto produces aluminum, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt, talc) and iron ore.

In a Feb. 2 client note, Citi Investment Research, a division of Citigroup Global Markets, noted that Chinalco might be interested in joint-venture assets in coal and iron in Australia.

Citi calculated that a 15% interest in Hamersley, for instance, would be worth about US$5.4 billion and a 25% stake in Rio Tinto’s Australian thermal coal operations about US$2.2 billion.

Rio Tinto’s iron ore group wholly owns Hamersley Iron in Western Australia. According to Rio Tinto’s website, Hamersley Iron owns six mines and also operates the 60%-owned Channar mine, a joint venture with an Australian subsidiary of the China Iron & Steel Industry & Trade Group Corp. and the 54% Eastern Range mine, a joint venture with Shanghai Baosteel Group.

Citi analysts also pointed out that a convertible instrument “could term out maturity of RIO’s debt (US$8.9 billion in 2008 and US$10 billion in 2010) and if done in conjunction with a placement could provide a short term side step around the current 15% holding restriction imposed by the Australian government.”

They also argued that a rights issue is “unlikely” and a “last resort” because asset sales “could still surprise to the upside as the sale of Corumba and Potash” has demonstrated.