More than five years after pulling off the largest takeover in Canadian corporate history, Rio Tinto PLC is still dealing with the pain.
The multinational miner never truly recovered from the massive debt load it took on to buy Alcan in 2007, paying $38.1-billion (U.S.) for the Montreal aluminum producer at the peak of the commodities market.
Burned by a bad bet on the prospects of the metal used to make pop cans, Rio has had to sell billions worth of mining assets to repair its balance sheet. In January, Tom Albanese, the chief executive officer responsible for the Alcan deal and about $14-billion in acquisition-related writedowns during his tenure, resigned and was replaced by the former head of Rio’s iron ore operations, Sam Walsh.
With aluminum prices still failing to recover as much as many of the other commodities Rio produces and with production costs for most operations continuing to increase, Rio and its new CEO are now putting more assets on the block, including the company’s Canadian iron ore operations in Labrador.
Rio’s 58.7-per-cent interest in Iron Ore Co. of Canada is up for sale and the company has hired investment bankers to facilitate a transaction, according to two sources familiar with the matter.
The banking firms hired are understood to be Credit Suisse and CIBC World Markets. One source said Rio is aiming for a quick deal.
London-based Rio’s stake in IOC could be worth as much as $3.5-billion to $4-billion. Japan’s Mitsubishi Corp. controls 26.2 per cent of IOC and the remaining 15.1 per cent is held by Labrador Iron Ore Royalty Income Corp.
A Rio spokesperson declined to comment. However, Mr. Walsh, asked recently by an analyst about the company’s willingness to sell its stake in IOC said, “I am looking hard at divestments. There are a number of assets for us that are not core or they are underperforming.”
Prospective buyers could include Canada’s Teck Resources Ltd. The Vancouver company, led by CEO Don Lindsay, is Canada’s biggest diversified mining firm and has long coveted the IOC operations as a potential entry point into iron ore production. Teck is already the world’s second-largest exporter of seaborne coking coal used in steel production. Iron ore is the other primary ingredient needed to make steel.
Like Rio, Teck has been kept from making major asset purchases owing to its own ill-timed takeover deal. In 2008, just as the global financial crisis walloped credit markets and the international economy, Teck completed a $14-billion takeover of Fording Canadian Coal Trust. The deal almost sank the company, but a minority investment in the Canadian miner by China’s sovereign wealth fund China Investment Corp. and other savvy moves by Mr. Lindsay kept Teck afloat.
During a call with analysts following Teck’s most recent quarterly financial report, Mr. Lindsay signalled Teck is once again considering iron ore acquisitions.
“I enjoyed a good holiday from iron ore for quite a few weeks there, but values have come down,” Mr. Lindsay said, according to Reuters. “There’s a few new assets that have come available, so we still think that’s a good fit in our portfolio.”
A spokesman for Teck declined to comment Friday.
Other potential buyers could include major diversified miners such as Glencore International PLC, which is currently trying finalize a merger with Xstrata PLC and is reportedly looking for iron-ore assets to compete with rivals such as Rio and BHP Billiton Ltd., the world’s largest mining company.
Buyers from Asia, the region where solid economic growth is driving much of the demand for iron ore, could also be interested in the IOC assets. They could include South Korea’s Posco, or any number of firms from China. Posco, as part of a consortium, recently purchased a minority stake in one of ArcelorMittal’s Canadian iron ore operations for $1.1-billion.
Rio’s potential sale of its majority IOC stake could also provide an opportunity for IOC’s other owners to sell. Labrador Iron Ore Royalty has been under pressure from a hedge fund to take steps to maximize value for shareholders. Waratah Advisors, in a letter sent to the company’s board, argued that Labrador Iron Ore “trades at a large discount to the fair value due to: a confusing and inefficient corporate structure; poor allocation of capital; an unmanaged balance sheet; limited market presence in Canada and the United States; and an inactive corporate strategy.”
Waratah wants Labrador Iron Ore to sell its stake in IOC and believes the operation’s infrastructure assets, which include railway lines and a port, could be of interest to other buyers.
The possible sale of its IOC is just the latest Canadian asset Rio has put on the block. Last year, it announced plans to sell its 60-per-cent interest in the Diavik Diamond Mine in the Northwest Territories.
There are several other iron ore assets on the market right now but mature producing operations like IOC are rare. The mines have been in production since 1954.