By Barry Fitzgerald
A SHARE-PRICE battered and debt-ridden Rio Tinto has moved to reassert control of its future in the absence of a $105 billion takeover bid from BHP Billiton.
Since BHP pulled its generous scrip takeover offer of 3.4-for-1, Rio has retreated to its London bunker to devise a plan aimed at convincing the market that it can manage as a stand-alone operation in the lower commodity price and credit-constrained world.
It unveiled its predictable response late yesterday: more than 14,000 people, or close to 15 per cent of its global workforce, are to be sacked, most of them from the company's ill-fated $US38 billion acquisition last year of the North American aluminium group Alcan.
Rio shares soared 20% in London trading to 1,514 pence, adding to yesterday's advance. BHP Billiton shares gained 6.7% to 1,234 pence, also extending a rise on local markets yesterday.
Capital expenditure for 2009 has been slashed from $US9 billion ($A13.68 billion) to $US4 billion, and the range of assets that might be sold has been increased.
The end result is a commitment to reduce net debt by $US10 billion by the end of 2009.
That was something that Rio had essentially committed to do by the end of this year. But its plans for more than $US10 billion in asset sales in 2008 fell foul of the collapse in the private equity buy-out market and the September global financial crisis.
Tom Albanese, Rio's newly endorsed managing director — by the board in the wake of the failed BHP deal — would not specify yesterday where the job cuts would be made.
His stock response to questions on the reasons for the big job losses and capital expenditure curtailment was that the world had changed.
Analysts said that on a worse-case scenario, Rio's highly profitable Australian iron ore, coal and aluminium business might lose 1000 positions. But it could well be fewer, given the comparative parlous state of Alcan's North American business, compared with Rio's Australian operations.
Australian job losses would fall most heavily in Western Australia, where production cuts have already been announced in the Pilbara iron ore operations, with cuts in coking and steaming coal operations in NSW and Queensland to come.
The shock in last night's announcement was that it was presented to the media by Mr Albanese alone. Rio chairman, the London-based Paul Skinner, was not part of it.
His absence raised speculation that he could bring forward his intended December 2009 retirement to take up a post as head of oil giant BP.
More to the point in some investor minds was Rio's revelation that its promised a 20 per cent lift in dividends in 2008 and 2009 (2007 was $US1.36 a share) has been abandoned.
In a recent visit to Australia, Mr Skinner made it clear that the increase in dividends — a key plank in Rio's defence against BHP's bid — was not under threat following BHP's abandonment of its takeover bid.
Institutional shareholders could care less about the junking of the dividend lift, preferring to see Rio tackle its debt load, which stood at $US38.9 billion at the end of October. But the retail shareholder base will have another view.
Rio is not in dire straits. By the end of October it had reduced net debt by $US3.2 billion, despite the squeeze on cash flows from lower commodity prices. The main task ahead is the $US8.9 million that needs to be repaid by October next year.
Rio will not be able to rely on a commodity-price upswing to solve its problems, so it will rely on previously announced asset sales and potentially more sales of the family silver.
The big unknown is what appetite state-owned Chinese groups might have for Rio's enlarged fire sale.