Rio's Canadian problem

Rio Tinto’s (RIO) asset disposal program has hit a bump – a very large one if a report from Reuters is accurate. The news agency says private equity firms Apollo and Blackstone and the world’s biggest commodities trader, Glencore, have pulled out of the bidding for Rio’s 59% stake in the Iron Ore Company of Canada.

That’s worrying on two fronts. If Apollo and Blackstone, which typically hold assets for five to seven years, have walked away then the prospect for iron ore prices is perhaps not as buoyant as current prices suggest. The spot price for iron ore imported through the north east Chinese city of Tianjin was $US131.40 a dry metric tonne yesterday. That’s up 19% since May 31, its 2013 low. Commodity analysts have forecasts of iron ore sliding below $US90 a tonne in five years as global supply, notably from the Pilbara, increases to the point where it may swamp demand as Chinese growth becomes less stratospheric.

Secondly, the due diligence done by Apollo, Blackstone and Glencore may have drawn the conclusion that given iron ore price forecasts, an investment in the Iron Ore Company of Canada may not provide a sufficient profit margin. Reuters reports Rio Tinto wants $US3.5-$US4 billion for its stake. Rio Tinto did not return calls from Markets Spectator seeking comment.

Investment bankers are quite candid that Rio Tinto’s prospects of selling its shareholding of the Iron Ore Company of Canada are not rosy. If you want iron ore assets, the bankers say, you buy the ones in the Pilbara and Brazil. Everything else is second or third tier. Rio Tinto, Reuters reports, may have to cut its asking price by perhaps as much as half. That would mean a sale price of about $US2-$US3 billion.

Rio Tinto has had mixed results with a sale process of assets it has deemed as non-core. It has decided to keep its diamond unit after unsuccessfully seeking a buyer after exploring an initial public offering of the business. Still, Rio Tinto has sold its gold and copper mine in New South Wales and a nickel and copper mine and mill in the US. These two sales fetched about $US1.1 billion.

But prospective buyers are driving a hard bargain. They obviously are bearish on commodity prices. Sam Walsh, Rio Tinto’s chief executive, will have to exercise considerable patience and fortitude to get a good deal for his shareholders out of the sale of his Canadian iron ore assets.

At 1136 AEST Rio’s shares were down $1.09, or 1.8%, to $58.77. The stock has gained 10% in the last 12 months, according to Bloomberg data (see Tim Treadgold's Re-examining Rio).