Rio Tinto Is Running Out of Room to Maneuver

Once again Rio Tinto (NYSE: RIO  ) is confronted with the reality that everyone dumping their unproductive, non-core assets on the market at the same time is undermining its ability to sell its own iron ore projects. 

Iron Ore Company of Canada. Source: Rio Tinto

Bloomberg reported the other day that China Minmetals is likely withdrawing from the bidding process for Rio's Canadian iron ore mines while Teck Resources (NYSE: TCK  ) , which has already said its interest is "grossly overblown," has hinted it may do so as well.

Beginning in March, the world's second largest miner began the process of unloading its 58.7% stake in the iron ore pellet and concentrate project in Newfoundland and Labrador. As the biggest producer of iron ore in the Great White North, the Iron Ore Company of Canada ought to be able to command a premium, and Rio is said to be asking for some $3.5 billion. But with everyone from BHP Billiton (NYSE: BHP  )  selling its Australian Jimblebar mine to MMX selling its Chilean assets, it's becoming more difficult to find someone to pony up. Supply and demand dictates when there's so much to choose from pricing is the first thing to go.

Early on Rio's asking price scared off private equity firms like Blackstone and Glencore, whose bids were viewed as too low, and more recently we're seeing other likely candidates put off by the high price as well.

Chinese customers would be a natural target market as IOC's ore is primarily bought by major mills there, so analysts think a steelmaker might be willing to step up. Minmetals, China's largest iron ore and steel trader, expressed interest early in the process, noting it already has investments in other Canadian iron ore projects in the region, but that isn't panning out either apparently.

While Rio targeted some $5 billion in cost savings that it wanted to effect this year and next, it isn't necessarily forced into letting IOC go at a fire-sale price. First, it's already sold almost $2 billion worth of non-core business so far, so it's well on its way toward meeting its goal, but also the price of steel-making coal has begun to stabilize. 

The world's largest iron-ore exporter, Australia, is witnessing greater Chinese consumption of the raw material, allowing it to raise its price estimates for the steelmaking input. It anticipates prices will average $119 a metric ton next year, a 6% increase from the $112 forecast that was made just this past June. Ore prices hit a low back in May but have since rallied to over $134 a metric ton.

Perhaps Rio can follow the lead of Vale (NYSE: VALE  ) , the biggest iron ore producer. It has been focusing its energy on extracting the greatest profits out of iron ore while selling off unrelated operations, such as proposing to unload its stake in aluminum producer Norsk Hydro and bauxite producer Mineracao do Rio Norte.

Maybe all Rio Tinto needs to do is sit on the iron ore operation awhile longer and it will become a viable, core business once more.

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