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Rio Tinto's Restructuring Bounce

By David Smith - Updated Apr 5, 2017 at 8:01PM

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The market clearly liked Rio Tinto's midweek announcement; but should you?

Through the first half of the trading day Thursday, London-based mining and metals giant Rio Tinto's (NYSE:RTP) American depositary shares shed about $2.00 of their value. That negative quickly turns into a positive, however, when you take into account the company's $21.41 jump (nearly 30%) the day before.

The strong midweek improvement followed management's announcement that a restructuring aimed at dealing with a combination of plunging commodities prices and acquisition-related debt will occur more quickly than had been expected. The program, which clearly tickled the market's fancy, will include the cutting of 14,000 jobs (13% of the workforce) along with other measures designed to shore up the company's financials, which include nearly $9 billion in debt coming due in October:

  • Capital expenditures will be cut from the $9 billion that was planned for next year to an amount that could be limited to $6 billion total for 2009 and 2010.
  • Cuts in operating costs could reach $2.5 billion during each of the next couple of years.
  • While it appears that the company's dividend is safe for now, earlier plans to raise the payout by about 20% have been shelved.

Rio Tinto, which has $6.5 billion left untapped on its credit facilities, clearly is paying rapt attention to balance sheet strength these days. Last year -- in another era for the credit markets -- the company borrowed $40 billion to facilitate its purchase of Canadian aluminum producer Alcan.

The purchase swept Alcan away from a smaller offer from Pittsburgh-based Alcoa (NYSE:AA). In turn, Alcoa and Aluminum Corp. of China (NYSE:ACH) teamed up earlier this year for a 9% stake in Rio Tinto. The two companies' obvious intent was to position themselves to throw a monkey wrench into a possible combination of Rio Tinto and Australian mining and energy giant BHP Billiton (NYSE:BHP), which then was in hot pursuit of its London-based rival.

Late last month, BHP withdrew its offer of 3.4 of its shares for each share of Rio Tinto. The result was a steep and rapid plunge in Rio Tinto's share price.

But while it's clear that the market was favorably disposed to Rio Tinto's latest series of moves, the key question surrounding the company and its peers -- copper producer Freeport-McMoRan (NYSE:FCX) and giant steel manufacturer ArcelorMittal (NYSE:MT) also have cut staff of late -- involves the pace of a mining commodities recovery. That's especially true given questions about demand from China.

My inclination is to give the sector a wide berth until that question can be answered more definitively.

Rio Tinto has been accorded four-star status by Motley Fool CAPS players. Does that rating include your vote?

Related Foolishness:

Fool contributor David Lee Smith doesn't have a financial position in any of the companies mentioned. He does, however, welcome your questions or comments. The Fool has a disclosure policy.

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Stocks Mentioned

Alcoa Inc. Stock Quote
Alcoa Inc.
AA
BHP Group Stock Quote
BHP Group
BHP
$55.76 (0.74%) $0.41
Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
FCX
$31.62 (-0.16%) $0.05
ArcelorMittal Stock Quote
ArcelorMittal
MT
$25.40 (0.04%) $0.01
Aluminum Corporation of China Limited Stock Quote
Aluminum Corporation of China Limited
ACH
$9.16 (-0.76%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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