Reuters reported that Rio Tinto may have to swallow a cut price deal if it wants to get the sale of its aluminum division away.

That’s the view of Deutsche Bank analysts who have slashed their valuation of Rio’s interests in six Australian and New Zealand aluminum assets to USD 4.4 billion. The new valuation represents a whopping 32% drop on its previous USD 6.5 billion estimate a little over 4 months ago.

Rio insists it isn’t a forced seller of the Pacific Aluminum business and there’s still plenty of time for the aluminum price to recover. At an investor strategy day on November 29, Rio’s management pointed to their strong balance sheet and a timeline that extends to 2015 to scotch any talk of an imminent firesale.

Mr Paul Young of Deutsche said that “We expect that Pacific Aluminum’s new management will be given time to define the earnings potential and free cash flow of the assets and improvement opportunities we thus assume the business unit is divested by the H1 of 2013.”

The broker reckons Rio’s sale could be through an initial public offering, similar to its divestment of its US coal business through the IPO of Cloudpeak. Other options include an in specie distribution, trade sale or even a break up.

As well as Pacific Aluminum, Rio management flagged the sale of three smelters and specialty Alumina refineries. However the closure rather than the sale of the higher cost smelters may be a more realistic option.

Deutsche expects USD 6 billion writedown from its USD 38 billion aluminum division. Because it is non cash it won’t impact Rio’s cost of debt and also won’t change any upside from the proposed transformation program which Deutsche estimates could see the division contribute 20% of group earnings by 2017.

(Sourced from Reuters)