Steel Yourself for Change at Rio Tinto


Having a finger in many pies is no longer the way Rio Tinto wants to operate anymore. It may have had diversified mining interests in the past, but new management has it focused on just one task now, and it is quickly putting up the "for sale" sign on anything that doesn't align with that vision.

Down the mine shaft
After posting its first-ever full year loss in February -- and a $3 billion one at that -- newly hired CEO Sam Walsh is set on doing what's necessary to turn the miner around, and that apparently means jettisoning everything that doesn't make it money.

While iron ore has always been Rio's biggest operation, accounting for nearly half of its $51 billion in annual revenues, it's also been its sole money maker generating 80% of its pre-tax profits. It's natural that iron ore will be what's left after it sells off a lot of its other assets. It recently announced its intention to put a shingle out for its Australian coal assets and its hired advisors to find a buyer for its copper and gold mines down under. Its aluminum mining business has been up for sale for two years now.

BHP Billiton finds itself in an extremely similar situation: a new CEO and plans to divest itself of non-core assets. Analysts think the miner could realize as much as $25 billion from a sale while Rio Tinto may be able to book $10 billion or more. BHP has already sold off some $4.5 billion worth in four sales since last August and has idled a handful coal operations in recent months.

A dirty word
Coal is just not a healthy business. Consumption in the U.S. fell by 11% in the fourth quarter of 2012, according to the Energy Information Administration, while production was down 12%. Some 90% of coal gets burned to produce power, yet electricity use is down 2% over the past five years. Even so, the shale natural gas boom has made natural gas more competitive just as coal was looking cheap. Without the same stigma associated with it as coal, natural gas has led more utilities to switch from coal-fired plants to gas-fired ones, with tthe pace of divestiture is quickening.

Dominion Resources agreed just last month to sell interests in three power plants to private equity, while Ameren is unloading five coal-fired plants to Dynegy.

Yet Rio Tinto's bet on iron ore isn't a slam dunk, either. Goldman Sachs recently forecast falling prices as demand and steel production drop in China, the largest market for iron ore and Rio's biggest geographic segment. Ore imports fell to 56 million tons in February, down from 65 million in January. Cliffs Natural Resources is idling an iron ore pellet plant in Canada because of falling prices.

The admonition to do one thing and do it well just might not be the salve that Rio Tinto needs to heal itself.

Canary in a coal mine
Cliffs Natural Resources has grown from a domestic iron ore producer into an international player in both the iron ore and metallurgical coal markets. It has also underwhelmed investors lately, especially after its dramatic 76% dividend cut in February. However, it could now be looked at as a possible value play because of several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's premium research report on the company.

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