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Is Rio Tinto’s spin off on the cards?

June 23, 2016 | Team Kalkine
Is Rio Tinto’s spin off on the cards?

 
The new CEO, Jean-Sebastien Jacques, joining Rio Tinto has already announced for a shakeup of the management structure. Veteran Andrew Harding was widely seen as a potential CEO, is going to step down as the head of the Iron ore division to be replaced by the Acting Chief of the copper and coal division, Chris Salisbury. This would suggest that the company is moving away from the iron ore business and the press release points out that the business will be focused exclusively on the world class operations in Western Australia. Rio seems to be putting about US$ 9 billion of unwanted assets from coal and uranium to Canadian iron ore.
 
Copper is now referred to as a marketing led business and the business approach will be the identification of customer requirements by market research before the release of a new product or service. This can be interpreted as aligning demand and supply so that volumes will grow only there is an actual market demand. This appears to differ from the strategy for iron ore, which focused on protecting market share, rather than worry about price. In addition, the company is creating an energy and minerals group, which now includes the businesses of coal, uranium, salt, borates and titanium dioxide, as well as the Iron Ore Company of Canada. Observers believe that the company will follow the lead of BHP Billiton in a spinoff of non-core assets, along the lines of the South32 model.
 
Market stands in agreement that the company will retain high-quality assets in some of the divisions, but are divided on the possibility of a spin-off. The experts agree that there are likely to be assets in the energy and minerals division, which are not considered as core. In addition, to balance the reliance on iron ore earnings, there are many benefits from retaining some of the other counter cyclical commodities such as uranium. The energy and minerals division is seen to be posting an EBITDA of USD 1.2 billion next year, which would give a valuation of around US$ 9.3 billion at a multiple of 8 times earnings. The management reshuffle has completely overhauled the business divisions and placed the least prized units under the umbrella of the energy and minerals business. It looks  much like the South32 portfolio before the spin-off by BHP. The unit will be headed by Alan Davies.
 
Three years ago, the company had decided not to sell the mines in Western Australia, but this was just before the plunge in iron ore prices. All the speculation comes as the company announced that it would reduce its gross debt by $ 3 billion after accepting the purchase of $ 1.25 billion under its maximum tender offer and $ 1.75 billion under its any-and-all offer. As of December last year, the net debt stood at $ 13.7 billion. The company has also been implementing cost-cutting measures, which includes the sale of assets to cut its debt.
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