Image Source: Rio Tinto
Due to concerns about economic growth in China and the corresponding impact on demand for iron ore, the broader mining sector has been under pressure during the past few months. Mining giants are looking to shed small or unproductive assets in order to strengthen balance sheets. Best Ideas Newsletter holding Rio Tinto (click ticker for report: ) made progress Thursday, shedding its Eagle project in the upper peninsula of Michigan for $325 million.
The buyer is Canadian-based Lundin Mining Corp, which will take over the project that began 3 years ago and is approximately 55% complete. Eagle wasn’t a bad asset, as it is located in the US, is in an advanced stage of development, and could produce 300 million pounds of nickel and 250 million pounds of copper. However, it simply didn’t fit as a core asset for Rio Tinto. Plus, Lundin estimates it will cost $400 million to bring the mine on line, an expenditure that Rio wants to avoid as it cuts costs and preserves cash.
While not a huge number, we think this will be the first of many asset divestitures the company will make over the next few years that will leave it in a stronger financial position. The company’s stake in the Iron Ore Company of Canada is for sale, and Rio believes it will bring in $3.5-$4 billion. In our view, Rio is also on pace for $750 million in cost cuts compared to 2012.
Valuentum’s Take
The mining industry is often a wild ride for investors as a result of high fixed costs, cyclical demand, and volatile end markets and pricing. However, we think Rio Tinto has rediscovered the importance of prudent capital management, and its balance sheet and cost structure continues to improve.
We’re comfortable holding shares of the diversified miner in the portfolio of our Best Ideas Newsletter. We think the company’s cost and capital discipline will increase returns to shareholders via value creation and dividends. We note, however, that our position in Rio Tinto is relatively small compared to other ideas in our Best Ideas portfolio.