Iron ore miner Rio Tinto (NYSE:RIO) is finding out how difficult it can be to negotiate from a position of weakness. As it tries to unload assets to shore up its financial position, buyers are trying to take advantage of its diminished position by low-balling offers. The miner's not so desperate yet that it will take any old offer that comes along, but it shows that when you're having a garage sale of anything that's not nailed down during a difficult industry period, you're not going to command top dollar.
Case in point is the failure thus far of Rio Tinto to find a buyer for its 59% stake in its Canadian iron ore assets. The operation is Canada's largest producer of iron ore, and despite having three bidders for the assets, all the offers made were apparently substantially below the already fire-sale price the miner was asking.
Not that you can blame them. There are a host of iron ore mines on the market for sale, a bunch of which aren't even Rio Tinto's. BHP Billiton (NYSE:BHP), for example, is selling its Jimblebar mine in Australia to two Japanese companies, Brazil's MMX is mulling over whether to sell its project under construction in Rio de Janeiro state, Fortescue will be selling off assets in the September quarter after sharply reducing production targets, and the U.K.'s Stemcor is selling off Indian assets. So the market is flush with potential projects to buy.
Couple that with questions over how much demand there will be for steel with China's economy slowing -- albeit at a slower rate than was expected -- and buyers are right to be cautious about paying too much for something that could be worth a lot less tomorrow.
China is looking for its GDP to grow no less than 7.5% this year, which other industrialized nations would give their eye teeth for, but it represents a lower output than the 8% analysts were forecasting earlier this year and is well below the 10% or better growth it achieved over the past few years.
So where steelmakers such as ArcelorMittal (NYSE:MT) may have been interested in some of Rio's assets, figuring out how to put them to productive use as the market for steel wanes would be no small hurdle to surmount. It also sold its own Canadian iron ore assets earlier this year for $1.1 billion.
Similarly Teck Resources (NYSE:TECK) was thought to be a potential buyer as it looked to gain leverage with steelmakers, but the miner scoffed at the suggestion, calling its involvement in any big asset purchases to be "grossly overblown."
In the end, Rio TInto had whittled the list down to three private-equity firms, and they were just eliminated because their bids were too low. That's another blow to the miner, which also just gave up on trying to sell its Pacific Aluminum asset and failed to find a buyer for its diamond mines earlier this summer.
I wouldn't count Rio Tinto out just yet, however. It has managed to sell sell almost $2 billion worth of non-core business so far this year, and though its shares are still 20% below their recent highs, they've also bounced some 20% off their recent lows, putting the stock just about where it was a year ago. That might not sound so encouraging, but with miners such as Vale down 18% and Teck down 7%, investors may feel somewhat encouraged by Rio's recovery.
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