MARKETS SPECTATOR: Sam’s sales dilemma

Rio Tinto's chief executive, eager for some extra cash flow, is finding the sale of unwanted businesses hard going.

Rio Tinto chief executive Sam Walsh likes to say that when he worked in the automotive industry for two decades he and his colleagues measured costs savings in cents rather than dollars. Walsh’s ambition for cost savings at Rio is far more grand. He wants to cut $3-$5 billion in costs from the miner. And Walsh seems to wants to do it quickly.

How else to account for the sale of Rio's tin-copper mine and mill last week for $US325 million? Some have complained Walsh sold it for half its value. The credit rating agencies are threatening to downgrade Rio single-A credit rating because of cash flow concerns associated with the company’s iron ore operations. Walsh seems not to care that he may be selling businesses at the bottom of the commodity cycle when the company bought many at the top of the cycle.

To be fair to Tom Albanese, Walsh’s predecessor, he had put Rio’s Pacific Aluminum business and its diamond operations on the block more than a year ago. Still, he lost his job largely because of the ill-conceived $US38 billion acquisition of Alcan. Albanese’s successor Walsh may have to start examining an initial public offering for Pacific Aluminum and diamonds. But such IPOs may take 12 months or longer. Rio shareholders may be offered stock in both businesses that may be spun out as separate companies that may be a convoluted and complicated process.

Still, Rio’s 59 per cent stake in Iron Ore Co of Canada has attracted buying interest, most recently from billionaire Leon Black’s private equity firm Apollo Global Management, according to Bloomberg News. If Rio’s stake in the Canadian iron ore miner, worth from $2-$3.5 billion, according to Credit Suisse, can be sold for what the investment bank thinks it may be worth then such a sale goes some way to satisfying Walsh’s ambitions.

The problem for Walsh is that he is not doing such sales in isolation. His counterparts at Anglo American, BHP Billiton and Glencore are seeking to sell what they perceive as noncore operations. It’s going to be a tough couple of years for CEOs such as Walsh, especially if commodity prices offer no relief.

AT 1242 AEST Rio shares were down 46 cents, or 0.9 per cent, to $53.19. The stock has declined 6.7 per cent over the last 12 months. The S&P/ASX200 Index had declined 47.582, or 1 per cent, to 4778.30. The index has gained 16 per cent in the last 12 months.