Rio Tinto CEO Sees Mining Distress Spreading to Majors

Walsh Sees a Tough 2016 For Rio Tinto, Worse Than 2015
  • Rio has M&A target list for mines not yet for sale, CFO says
  • Range of industry assets better suited to Rio, Walsh says

Distress from the commodity-price rout may soon spread from small mine operators to industry majors, forcing some to sell desirable assets and creating opportunities for others, the world’s second-biggest miner said.

“We will see distressed players not only at the junior and mid-tier level, I think it will actually flow through to some of the majors,” Rio Tinto Group Chief Executive Officer Sam Walsh said in an interview with Bloomberg Television on Thursday. “There are a range of assets that could be more natural in Rio Tinto’s portfolio than some others.”

The biggest miners such as Rio and BHP Billiton Ltd. have reined in acquisitions in recent years as some of the industry’s most profitable assets remain tightly head by smaller rivals. Rio has a list of assets it’s keen to buy should they be put up for sale, Chief Financial Officer Chris Lynch said on an earlier call with reporters after the company announced a 51 percent drop in underlying profit and signaled a future dividend cut.

“At this stage there is nothing out there on the market that interests us,” Walsh said in the interview. “We are holding our powder dry as we focus on developing our own assets. There is no point buying distressed assets because they are distressed for a reason. They are high cost, low quality, poor infrastructure.”

Rio slumped 3.2 percent at A$39.70 at 10:07 a.m. in Sydney trading Friday, extending its decline to 34 percent in the past year. BHP declined 1.1 percent and Fortescue Metals Group Ltd. slid 2.1 percent.

Anglo Overhaul

Anglo American Plc is among major producers starting to offload unwanted assets. CEO Mark Cutifani will next week unveil details of an overhaul that will include the sale of most of its assets as its seeks to weather the collapse in prices for metals, coal and iron ore. Anglo will be centered around its dozen or so most lucrative assets, including diamonds through its De Beers unit, as well as copper and platinum.

“We have a list of assets that we would be very keen to own if they were to become free,” Rio’s Lynch said on the conference call. “We would have to be convinced of a compelling value equation but we would have capacity. We are very much interested in good-quality assets should they come on the market.”

Right Balance

Rio is trying to strike the right balance between returning cash to investors and growing the business, Walsh said. The company earlier scrapped its so-called progressive dividend policy, in which payments increase every year, and set out new spending cuts, joining rivals including Vale SA and Glencore Plc in trimming or abandoning payments.

After cutting costs and with gearing at the low end of its forecast range, Rio is the best positioned of major mining companies to carry out acquisitions, Deutsche Bank AG analysts including Paul Young wrote in a Feb. 8 note. Rio is among those who could seize on potential asset sales by Freeport-McMoRan Inc., according to Jefferies Group LLC.

“You have to stick to owning not just the survivors, but those who can ultimately profit from other people’s weaknesses, and Rio are in a position to do so,” Jeremy Sussman, a New York-based analyst at Clarksons Platou Securities Inc., said by phone Thursday.

Mining companies from Glencore Plc to Freeport have flagged asset sales alongside measures including cuts to dividends and equity raises as they attempt to navigate the impact of cratering commodities prices and growth in China, the top commodities consumer, that fell to the slowest pace in 25 years in 2015.

“Who are the logical buyers? When we go back to balance sheet strength, then outside of private equity, BHP and Rio are going to be involved in almost every conversation.” Sussman said by phone.

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