Rio Tinto's RIO proposed streamlining of aluminum assets is positive though we make no allowance for it yet in our forecasts. We'll wait for any confirmation on asset pricing before making adjustments. The earmarked assets, largely Australian, might eventually be sold outright, floated on the market or distributed in specie to shareholders. They might fetch in the vicinity of USD 5 billion to USD 6 billion.
Our current fair value estimate for Rio's aluminum assets is USD 25 billion. Assets for disposal are 25% of the total by capacity but are some of the highest cost. The USD 5 billion to USD 6 billion estimate would seem about right. Our valuation has declined marginally but this is due to softer than expected Q3 copper and aluminum performances unrelated to streamlining. Similarly, our fiscal 2011 and fiscal 2012 earnings forecasts declined marginally, though we retain our positive stance.
The company's streamlining of the aluminum product group comes after a strategic review. In all, 13 assets will be divested at some stage in the future to grow the high quality, Tier 1 assets and improve the product group's financial performance. The aluminum segment has been a basket case since Rio purchased Alcan for almost USD 40 billion at the end of 2007, operating at little better than break even. Over 2009 and 2010, RIO sold down about USD 4 billion or 10% of the noncore Alcan purchase cost including USD 3.2 billion for the Alcan packaging businesses, USD 350 million for Alcan composites, USD 140 million for the Ningxia smelter and undisclosed sums for stakes in the cable and engineered product divisions.
The current state of play sees Rio with interests in 4 bauxite mines, 5 alumina refineries and 21 smelters globally. The majority 85% of bauxite capacity resides in Australia at Weipa and Gove and three fourths of alumina capacity is also Australian with the Gove, Queensland Alumina and Yarwun refineries. The smelters are spread far and wide with the largest 31% capacity share in Canada followed by 20% in Australia and 14% in Oman.
The classic integrated production volume ratio for bauxite alumina aluminum is 4-2-1. In equity capacity terms, Rio's ratio is currently 6.4-1.8-1. On paper it produces bauxite 50% in excess of requirements, while refineries produce around 85% of smelter requirement, a meaningful shortfall.
Rio intends to divest itself of the Gove bauxite mine and refinery and Boyne, Tomago, Bell Bay and Tiwai Point smelters via a spinout called Pacific Aluminum. Additionally a second group of seven noncore assets could be divested, including three specialty alumina plants and the Gardanne refinery in France and Germany, the Sebree smelter in the United States and the Lynemouth smelter in the United Kingdom. Lynemouth will simply be closed.
We see the logic: Ideally you want smelters located close to major markets and where power is cheap. Australia is miles away from anywhere. Canada fits the bill with its hydro power and Northern Hemisphere locale. With Australian and New Zealand smelters sold, the proportion of Rio's smelting capacity powered by hydro increases from 63% to more than 80% important in a world of increasing energy costs and growing carbon constraints.
Rio will increase alumina self reliance from 85% to more than 100%. The 2 million tonne per annum Yarwun refinery expansion commissions in the second quarter of 2012 and with smelter sell downs more than offsets the loss of Gove in terms of smelter requirements. Yarwun will be state of the art and in the lowest cost quartile. Alumina self reliance becomes increasingly important in a world where alumina prices are delinking from aluminum. Rio has more than sufficient bauxite capacity to expand alumina capacity further still.
In essence, this simply looks like a lowering of the cost profile and a carbon proofing of the aluminum business. Smelting capacity declines 27% to 3.9 million tonne per annum smelter grade refining capacity falls 30% to 6.3 million tonne per annum though by just 8% to 8.3 million tonne per annum after Yarwun's expansion and bauxite capacity by 22% to 26.6 million tonne per annum. Still, we expect the most important element for profitability will remain alumina's ongoing delinking from aluminum prices. Resource owners like Rio should be re empowered at the expense of high cost, nonintegrated smelters, particularly in China. Then and only then the Alcan purchase might look not so much misguided as inspired.
(Sourced from www.worldal.com)
