Mining major Rio Tinto, which currently holds claim to the title of world champion in mining debt levels, has announced the appointment of Jan du Plessis, currently chairman of British American Tobacco, as its new chairman. The news follows all kinds of drama at Rio Tinto, not least a new chairman who was appointed on 14 January 2009, only to resign three weeks later.A few days later, on 12 February, Rio Tinto announced its intention to sell convertibles of $7.2bn to smaller rival Chinalco, and equity stakes in some of its most prized assets for $12.3bn, also to Chinalco. Since then, Rio Tinto has been under increasing siege from a number of disgruntled shareholders, and certain politicians, not least some in Australia, where Chinese mining companies are increasingly popping up as white knights. Samples include Minmetals with its AUD 2.6bn takeover offer for debt-riddled Oz Minerals, and Hunan Valin, taking some big new equity stakes in debt-heavy Fortescue.In its 2008 annual report released on Monday, Rio Tinto said that if a potential cash injection into Rio Tinto of $19.5bn from smaller miner Chinalco does not materialise, Rio Tinto may have to consider other strategic and financing options. Sitting Rio Tinto chairman Paul Skinner, writing in latest annual report, stated that after the termination of BHP Billiton's offer for Rio Tinto in November 2008, I felt this was the right time to step down after five and a half years as chairman. The identification of a successor started in late 2008; Jim Leng was appointed chairman designate in January 2009, but soon threw in the towel, as noted.Du Plessis, who was appointed as a non-executive director of Rio Tinto on 1 September 2008, has been very diplomatic in his acceptance speech: I am delighted to have the opportunity to lead the Rio Tinto Boards at a time of significant change and to be working with such a strong management team led by chief executive, Tom Albanese. Our immediate focus must be on giving Rio Tinto the best possible platform to create shareholder value and to weather the tough and uncertain global economic conditions. Pursuing the completion of the transaction with Chinalco will give Rio Tinto this platform, from which we will be even better placed to prosper when we see economic recovery.
Du Plessis is also a non-executive director of Lloyds Banking Group plc, although he has indicated that he intends to stand down from that role in due course. He has been a non-executive director of Marks & Spencer since November 2008, and was previously group finance director of Richemont, the Swiss luxury goods group and chairman of RHM plc, then a leading British food manufacturer.
Above all else, perhaps, Du Plessis, a South African chartered accountant, will have to live with the legacy of Rio Tinto's acquisition in 2007 of Alcan, for a massive $38bn in hard cash. The hard nosed transaction was driven by Albanese, who succeeded in crushing Alcoa's initial offer for Alcan. Today, Alcoa's stock price is nearly 90% off its highs and Rio Tito's entire market capitalisation, or value, is $41bn, more than $100bn off its high value seen nearly a year ago.Of Rio Tinto's total post tax impairment charge of $8.4bn for 2008, $7.9bn relates to the group's aluminium businesses. Alcoa's entire market value is currently a mere $4.9bn, a far cry from only 2005, when the company ranked as the world's No 1 mining stock by value.Rio Tinto's net debt decreased during 2008 by $6.5bn, to $38.7bn by 2008 year-end. Among his recent comments, Skinner says that Rio Tinto remains a very strong standalone company with a world class portfolio of assets which, even in tough markets, are highly cash generative.Were BHP Billiton's all-paper offer still in the market today, it would value Rio Tinto at just over $62bn. Today, again, BHP Billiton sits with net debt of less than $5bn, and a market value of $111bn.
Rio Tinto made net capital expenditures of $8.5bn in 2008, but is now limiting capital expenditures for 2009 to around $4bn, to reflect falling demand, while sustaining its growth trajectory. The group's annual report states that Rio Tinto retains the goal of returning our balance sheet to a single A credit rating and will reduce net debt by $10bn in 2009. In the meantime our cash flows are able to repay the existing level of debt.So far in 2009, Rio Tinto has sold assets, separately to the proposed Chinalco deal, in the form of Jacobs Ranch for $761m; potash assets for $850m, and certain iron ore assets for $750m. Under certain circumstances, Rio Tinto may have to pay a break fee of $195m to Chinalco.SELECTED MINING NET DEBT: MARKET VALUE RATIOS
Note: most debt numbers are as at 31 December 2008
(1) 30 June 2008
(2) Unlisted; market value is an estimate
Source: market & company data; analysis by Barry Sergeant.