Rio Tinto Prices Offer - Analyst Blog

Rio Tinto Plc. (RIO) has priced 25.6 million shares of Cloud Peak Energy Inc.'s (CLD) offered under the secondary public at $19.50 each aggregating $499.2 million. On completion, Rio Tinto will have a 6.2% stake in the latter.

The underwriters also have a right to an over-allotment of 3.8 million shares, which if exercised will generate an additional $74.1 million.

Rio Tinto has also raised cash through divestitures, particularly the Alcan Inc. acquired in 2007. Rio Tinto's debt level had increased significantly as a result of the acquisition of Alcan. However, debt reduced by $6.5 billion during 2008 to $38.7 billion, almost halving to $18.9 billion at the end of 2009, and finally $12.0 billion at the end of the first half of fiscal 2010.

Since 2008, Rio generated more than $10.0 billion through the divestiture of Alcan and more divestments are expected to take place in the near term.

At present, Rio Tinto has also queued up a massive investment plan. This includes $800 million for completion of the underground block cave project at the Argyle Diamond Mine located in Australia, $1.6 billion investment for development of the Hope Downs 4 iron ore project, expected to be operational by 2013 with an annual capacity of 15 million tons, a $563 million MoU with Aluminum Corporation of China Limited, or Chinalco (ACH) for the development and operation of the Simandou iron ore project in Guinea, etc.

With its long-life, low-cost assets and a strong pipeline of attractive growth projects, Rio Tinto has assets that can generate positive cash flow under difficult market conditions. Though commodity demand from China and other emerging economies has slowed in the last couple of months, management is confident that industrialization and urbanization will continue in these markets, thereby strengthening the demand for Rio's products.

China is expected to grow by 9% in 2010. The Chinese steel consumption is expected to increase 6.7% to 579 million tons in 2010. China is expected to remain the largest consumer of metals in the years to come. Hence, the medium-term outlook for metal commodities remains encouraging.

Management expects the global demand for its key products such as iron ore, copper and aluminum to double by 2022, primarily driven by China, India and the emerging markets bloc. Rio Tinto's investment in various growth projects will enable it to capitalize on the long-term demand.