Renovating Rio Tinto; Walsh's work in progress

Sam Walsh has fixed the leaks in the roof, jettisoned some of the gaudy, uncomfortable furniture and replaced a few broken windows.

But he’s now focussed on shoring up Rio Tinto’s (RIO) foundations as he undertakes the mammoth job of a complete makeover for the stately but run down palace that he’s inherited.

Undoing the damage of the Albanese years will be no mean feat.  The spectre of the $US38 billion Alcan purchase, undertaken when aluminium prices were at 20 year highs, continues to haunt the group, primarily through its elevated debt levels.

Alcan alone almost sank the company. But it was the myriad of smaller purchases that were equally poor. Coal & Allied and Riversdale were just as disastrous.

Its offshore developments in Mongolia and Guinea have been problematic.  And don’t even mention the scuppered Chinalco deal that would have denuded Rio of its prized Pilbara assets (Walsh can thank BHP’s Marius Kloppers for bequeathing him that).

After being oversold for months, Rio shares soared in London partly on a relief rally that a steady hand now is at the helm and partly in reaction to China’s much better than expected July trade figures.

The result itself, largely expected, was weighed down by lower commodity prices. Underlying earnings came in 18% lower at $US4.23 billion.

It was a vision for the future that investors sought. But the vision remains hazy, particularly on the timing. Further cost cutting, tighter capital control, restoring the balance sheet and hopefully delivering a greater share of the spoils to investors (see Tim Treadgold's Re-examining Rio). They remain the priorities.

The sales process is in full swing. Right now though, buyers are thin on the ground, even for good businesses such as its diamonds operation, let alone its problematic cast-offs. That’s why Walsh is not tying himself down on timing. And that’s why debt will remain an issue for longer than many would like.

Rio Tinto is rapidly devolving into a pure iron ore company. Once the divestments are complete, as much as 93% of its earnings will derive from the red earth.

Renovating Rio, however, remains a work in progress and largely will depend on the speed of the global economic recovery.