BUSINESS
10/17/2011 08:39 EDT | Updated 12/17/2011 05:12 EST

Rio Tinto shares get boost on news it will sell 13 non-core aluminum units

MONTREAL - Rio Tinto's Canadian aluminum assets will remain among the jewels in the multinational mining company's crown after it divests 13 non-core assets in other countries in a move to boost profitability.

"The Canadian operations are part of what we call the top tier assets, especially as we're modernizing, leveraging our strong position with self-generated hydroelectricity, (and) are absolutely on strategy," said Jacynthe Cote, head of the Anglo-Australian miner's aluminum group.

Rio Tinto Alcan will sell 30 per cent of its overall aluminum production and 36 per cent of its alumina output as it focuses on its best assets.

The divestitures mean the company will slip to about the world's fourth-largest aluminum producer from its current No. 2 spot, but will remain No. 1 in bauxite while dropping to No. 2 in alumina, Cote said in an interview from Brisbane, Australia.

"In terms of quality of assets, ... there's going to be nobody else on the market of that size with such a small carbon footprint."

Led by its operations in Canada, all of its remaining operations will be powered by hydro electricity, nuclear power and a small proportion of natural gas.

Most of Rio's aluminum businesses were acquired when it bought Montreal-based Alcan in 2007 for US$38.1 billion near the height of a commodities boom and just months before the global economy fell into a deep recession.

Rio Tinto Alcan will continue to manage seven of the 13 assets: three specialty alumina plants and the Gardanne refinery in Europe, the Lynemouth smelter and a power station in the United Kingdom and the Sebree smelter in the United States.

Six other assets in Australia and New Zealand will be transferred into a new business unit, to be called Pacific Aluminium, which will report separately from the Rio Tinto Alcan product group before they are sold.

Cote said the company never considered selling any of its Canadian operations in British Columbia and Quebec, many of which are targeted for modernization.

It announced Sept. 27 that more than US$1.8 billion will be spent this year to continue developing two low-cost aluminum smelters in Quebec and British Columbia and a further US$1.8 million on other projects.

Over the long-term, it also plans to close its Shawinigan smelter by 2015 and modernize the Arvida works in Saguenay, Que.

The final go-ahead for the Kitimat, B.C., expansion is expected by year-end, followed by decisions on further phases of the company's AP60 project in Saguenay and Alma in Quebec.

Cote said the timing of these decisions will be affected more by macro-economic conditions than by any impact from the asset divestment, which has been in the works for more than six months.

"It's clear that Canada and Australia will be a significant proportion of our profits," she added, refusing to say if the divested assets are profitable.

The divestments will shed about 6,000 employees from the company's global workforce of more than 20,000. However, a string of expansions will eventually add back a few thousand positions.

The Montreal head office will continue to support those operations until the sales are completed, as well as provide other services. As a result, Cote said it would be premature to get into details about how the headquarters will change in light of the expected changes.

A decision on whether to move the headquarters to a new office tower continues to be expected by year-end.

Cote wouldn't say how long the company expects to take to sell the assets or how much it expects to generate in proceeds. Analysts have forecast the process could take 18 months and Rio Tinto's share could be between US$4.3 billion and nearly US$6 billion.

The miner has already sold US$11 billion of assets since it purchased Alcan, including the packaging and engineered products operations.

"We view this as a broad positive for Rio which, in our view, is disposing of its higher cost base assets with a positive impact on earnings, as well as positioning itself for a divestment of its non-core European aluminium assets," Des Kilalea of RBC Capital Markets wrote in a report.

Some discussions have begun with joint venture partners in Australia and New Zealand. Industry observers believe interest would likely be greater from smaller producers since large rivals are also focused on having top tier, low-cost assets.

Among the large players that could be interested, however, are Chinalco, the Chinese aluminum company that is Rio Tinto's largest shareholder, American-based Alcoa (NYSE:AA) and Russia's Rusal.

The grouping of the Pacific operations suggests Rio Tinto may wish to sell the assets together if the buyer can get regulatory approval and has the required financing.

"We're not excluding any options," Cote said, noting Rio is in no rush.

"We think they've got solid value and we want to really drive to get a fair value out of these assets, so this could take time, especially under the macroeconomic environment, so these plants will continue to need support services from our head office for quite a while until the process is completed."

Rio Tinto CEO Tom Albanese said the assets identified for sale are sound, well-managed businesses with productive workforces.

"But they are no longer aligned with our strategy and we believe they have a bright future under new ownership," he said in a statement.

Rio Tinto shares (NYSE:RIO) dropped $2.39, or 4.47 per cent, to US$51.12 Monday on the New York Stock Exchange.

In Australia, Rio's stock gained 2.4 per cent to close at A$69.95 on the Australian Stock Exchange, while shares gained 2.7 per cent on the London Stock Exchange.

— With files from The Associated Press