Rio Tinto Reduces Debt

Rio Tinto PLC (RTP - Analyst Report), the heavily indebted miner, has now cashed in over $7 billion in total by selling its non-core assets after its merger with Canadian aluminum group Alcan.

Last week, Rio agreed to sell its Alcan composites business to Switzerland's Schweiter Technologies for $349 million. The deal is expected to close by the end of the year.

The company targets to sell $15 billion in assets to lighten its debt burden it piled up from the $38 billion acquisition of Alcan in 2007. At the end of June 2009, Rio's total net debt was $39.1 billion. However, after the rights issue scheme in July, it managed to cut down its debt to $24.3 billion. It completed the $15.2 billion of rights issue in July.

The biggest check the company has received so far from its clearance sales was for divesting its business in Alcan's pharmaceuticals, global tobacco and food packaging divisions for $2.0 billion to Amcor Ltd in August 2009. This deal is the latest in Rio’s ongoing divestment program aimed at reducing its debt.

The company has $8.9 billion of debt maturing in 2009, $9.1 billion maturing in 2010, and another $10.0 billion in 2012.

Looking forward, we believe it is very important for the company to realize attractive prices for its assets in order to pay down debt. But if the company ends up selling non-core assets at distressed prices, meeting its debt reduction targets might be difficult.

Given the tough market conditions, we believe it could prove difficult for the company to dispose its assets at attractive prices, which in turn could have a negative impact on the shares.