Analysis by Nostromo Research
Rio Tinto’s shutdown of its aluminium smelter at Lynemouth in Northumberland, in north east England, announced recently, marks the start of the company’s attempt to reap some dividend for, arguably, the worst business decision taken in the company’s history – the acquisition of Alcan in 2007.
It’s hardly an auspicious beginning to Rio Tinto’s attempt to sell off 13 of its aluminium-related assets in its newly-packaged Pacific Aluminium. “Under performing” is something of a euphemism to describe just what these assets are worth.
Matt Chambers pointed out last month in The Australian that: “What remains to be seen is whether Rio can sell the four smelters and the Gove [bauxite and alumina] operations in a trade sale, is forced to split them up or floats them on the stock exchange.”
The split up has begun with the Lynemouth closuree – leaving over 500 workers on the scrap heap (nice timing Albanese, just as the UK government issues the worst ever unemployment figures for 17 years!)
Although it looks certain that no one will now purchase the Lynemouth plant – except in a “fire sale” of individual lots – the related coal fired/biomass power plant, which supplied not only the smelter but the national grid, is a different matter.
(As a wikipedia entry points out in an intelligent summary of the status of this power plant: “It is the most thermally efficient coal-fired power station in the UK. Two separate wind farm plans currently have permission to be built near the station…In 2009, Alcan announced that they hope to fit the station with carbon capture and storage technology. In 2011, it was announced that the power station may be converted to burn biomass only, in a bid to avoid government legislation”. (See http://en.wikipedia.org/wiki/Lynemouth_power_station.)
As for the other dozen assets within Pacific Aluminium, it’s anyone’s guess as to who might be interested in taking them over, though Glencore (never one to neglect opportunities afforded by buying at the lower end of the market and integrating the assets within its own global strategy) might be a front runner.
It seems unlikely that Rio Tinto would go for an IPO – and if so, even more unlikely that it would try for a primary listing on the London Stock Exchange (especially since, following the Lynemouth closure, public and investor opinion in the UK isn’t going to be that favourable. (The ASX would be the obvious target.)
At any rate, one is left with the firm impression that Rio Tinto, extremely well-cashed up as it is, doesn’t care particularly about what happens to these assets, nor the workforces at them.
“No doubt there will be plenty of analysis in the world’s press about the Rio decision” a well-informed commentator said, “and most of it should be positive. Rio gets back to doing what it does best, digging”.
And the company has shown no sign that it wants to shed its bauxite mining operations in northern Queensland.
However, the Gove operations are important for that particular enterprise – and Gove, at least at present, seems part of the Pacific Aluminium deal.
Another commentator makes the important point of “disagree[ing] that it’s a good thing for Rio to get back to digging things out of the ground. With 80% of their earnings coming from iron ore, the divestment of aluminium increases their dependency, or the risk factor for RT’s shareholders.”
Put bluntly – the company made an almighty hash of acquiring Alcan’s primary operations in the first place; and it looks to be almost as messy a job to dispose of them.
Rio Shutdown, http://www.businessspectator.com.au/bs.nsf/Article/Rio-Tinto-aluminium-Spotless-Pacific-Equity-Partne-pd20111117-NNRE3?OpenDocument&src=sph
Rio Tinto in no hurry on $3bn smelter sale, http://www.theaustralian.com.au/business/opinion/rio-tinto-in-no-hurry-on-3bn-smelter-sale/story-e6frg9if-1226169154465
Pacific Aluminium, http://az-china.com/blackchinablog/?p=1725 and http://az-china.com/blackchinablog/?p=1742
Analysis by Nostromo Research