Rio Tinto spent another day yesterday in the sights of short sellers and other bears determined to make a mess of the company.
The shares tumbled 11.7% to a new 52 week low of $32.50, a fall of $4.30 on the day.
That took the loss this week so far to a mind numbing 30% and with last week’s 22.3%; the loss is over 52% since BHP Billiton abandoned its bid.
There was no query from the ASX that we know of for the violent price fall this week, nor was there any statement from Rio, apart from ASX releases detailing small but significant changes to a couple of projects with supply contracts for employee housing being cancelled.
BHP shares yesterday eased fractionally (compared to Rio). BHP shares ended down 31 cents yesterday, or 1.12% at $27.50. That’s down from $31 last Friday which is understandable given the fall in oil and copper prices since then.
The way Rio is falling, its share price could pass BHP’s on the way down very soon.
There were rumours yesterday that Rio had started talks with bankers to renegotiate debt.
AAP reported that the company declined to respond to these reports which claimed that it has begun talks with banks to refinance debt incurred through the $US38 billion ($A58.65 billion) acquisition of aluminium producer Alcan last year.
AAP said Rio spokeswoman Amanda Buckley declined to comment on the speculation but said the reports had overstated the amount of debt maturing next year.
She said it amounted to $US8.9 billion ($A13.73 billion).
"A report by Dow Jones Newswires said the company had begun talks with banks about refinancing $US15 billion in debt due in October next year," AAP reported.
The smaller amount was clear from research published Wednesday by Citigroup.
Citi said that "Rio Tinto is bearing the full brunt of the economic slowdown as its commodity exposure, dominated by iron ore, aluminium and copper, has experienced a sharp reduction in profitability.
"Saddled with Alcan acquisition debt, the balance sheet is severely constrained."
The report got some publicity, but below are some of the key points from Citi’s client note.
- Where to from here — In the current economic conditions it is only prudent that RIO significantly curtails project capex and cuts dividend growth to maintain cash flow. Asset divestments are difficult in the current environment, but not impossible, and we identify potential assets that could be sold.
- Debt dilemma — ~US$7b in undrawn credit facilities and operating cash flow will largely meet the critical US$8.9b Sept-09 debt repayment on our estimates, but current prices, or lower, create a real squeeze without asset sales and/or significant curtailment of capex. There are levers to pull though.
The lower-than-expected aluminium price has to have a significant impact on the company’s projected cash flows at the time of the Alcan acquisition.
Further, the company had expected to divest $10bn of assets following the Alcan acquisition by the end of 2008.
In light of the current economic conditions the company has now delayed its divesture expectation; however this again puts more pressure on the company’s cash flow and balance sheet.
In addition to the impact on operating earnings, the lower forward curve also raises the potential for significant asset write downs at the full-year result.
We estimate the impairment charges against the Alcan assets could be up to US$10b if the forward curve remains at current levels at year end.
Balance Sheet
We have conducted a stress test review of Rio’s balance sheet.
On the day BHPB announced that it would not proceed with the takeover of Rio Tinto there was a sharp spike in the CDS premiums.
Rio’s CDS premium is now trading above the level seen for Lehman (which was trading around 900) at the time when it filed for bankruptcy.
This is clearly concerning and highlights the fragile state of global credit markets.
The critical component of Rio Tinto’s debt is the c$9bn of debt which is due to mature in September 2009.
Even once this hurdle is cleared, focus will quickly shift to the US$10b maturing in October 2010 that could rightly be an issue unless markets have improved.
Unused debt facilities are currently US$4.6b of the facility maturing in 2012 and US$2.3b in undrawn bilateral bank facilities.
One of the risks that has to be considered is banks attempting to extract themselves from these facilities, an issue that was potentially a reason behind BHP Billiton withdrawing its bid.
Given the constrained balance sheet, we expect RIO to significantly reign in project capex.
In the battle of the briefings with BHP Billiton during defence mode, both companies were at pains to point out the organic growth options available, with projected capex climbing inexorably towards US$10+b/year each as commodity prices boomed in 1H08.
With SIB capex ~US$2-3b depending on the stage of the cycle, it will be interesting to see how quickly projects that are underway get cancelled or slowed down, while some of the more aggressive and higher risk projects that were planned slip off the radar.
To simply say that all project capex is going to be cut is a far too simplistic view of the world and the stage the projects are at, but we have delayed and canceled a significant number of projects in our estimates.
We have allowed for 2009 capex to be cut from previous plans of US$10b to ~US$7.5b, staying largely flat into 2010 before dropping to US$5b in 2011.
Things could be very different by then allowing pro
