Jim Leng, the new Chairman of troubled mining giant Rio Tinto has quit abruptly despite having been employed by the company for only one month. This does not bode well as the company’s mountainous debt is at the core of why Leng is leaving the firm.
Bloomberg quotes Leng as saying “there has been a difference of opinion over which option the company should pursue.” Rio has “‘a financial issue to resolve in terms of its debt and repayment. I am hopeful that my resignation will enable the board to reach a consensual decision.”
Now I mentioned Rio’s problems in a December post which was very skeptical about Rio’s prospects going forward. However, skilled investors like Marc Faber have come out in Rio’s favor. In his January 2009 newsletter, Faber listed Rio along with Newmont Mining (NEM) and one-time Rio suitor BHP Billiton (BHP) as major mining firms which should see a rebound.
Indeed, Rio shares, bottomed at just under 1000p in UK trading. When I mentioned them, they had already risen to over 1500p. After falling to 1350 in mid-January, shares have soared to just short of 2000p. But this is a company in trouble.
Leng clashed with Chief Executive Officer Tom Albanese over plans to sell a stake to Aluminum Corp. of China, known as Chinalco, to reduce Rio’s $38.9 billion of debt, the Financial Times reported today.
“When you get that dramatic a turnaround in events, something has gone wrong,” said Shaun Giacomo, who helps manage $2.5 billion at SG Asset Management Pte. in Singapore. “They are under pressure, they are under siege and investors like myself are basically unhappy with the board.”
Rio said last week it was in talks with Chinalco to raise cash by selling debt and stakes in some units to reduce the loans taken to buy Canadian aluminum maker Alcan Inc. in 2007. The U.K.-based company plans to sell assets, cut jobs and reduce spending to lower debt by $10 billion this year.
Debt, Equity
The dispute “shows which way the wind is blowing in the Rio Tinto boardroom — speeding the ship to China,” Evolution Securities Ltd. analyst Charles Kernot, who has a “sell” recommendation on Rio, wrote today in a report. “Selling growth assets, or stakes therein, to repay debt reduces potential returns. Rio Tinto loses full control of cash flow.”
Rio is also in talks to sell $5 billion of assets to Japan’s Mitsui & Co., the Wall Street Journal reported Feb. 6.
BHP Billiton Ltd., which in November dropped a $66 billion takeover bid for Rio partly because of its debt, would also be interested in buying stakes in some Rio assets, BHP CEO Marius Kloppers said last week.
The long and short of this is that Rio Tinto loaded up on debt in order to take over Alcan. Shortly thereafter the commodities bubble burst spectacularly and prices have yet to recover. Given the Depression in major economies, it is not clear that commodity prices will re-assert themselves over the short-term. Therefore, Rio is cutting headcount, reducing capex and shedding choice assets into a depressed market in order to stay alive.
Now the new Chairman has quit as well. With shares having doubled in the last two months, I see Rio’s shares as being extremely overbought.
Source
Rio Seeks New Chairman as Leng Quits a Month After Appointment – Bloomberg.com