Stock Spinoffs

Rio Tinto Reorganizes- Is It Preparing For A Spinoff?

Rio Tinto (RIO) and its new CEO Jean-Sebastian Jacques are shaking things up. The mining behemoth unveiled a brand new organizational structure along with a set of new executives to drive the company forward during a difficult period. The company will now have four product groups and coincidentally a whole bunch of ‘non core’ assets ended up grouped together inside the Energy and Minerals group. So called non core assets include Rio’s coal and uranium mines, salt, borates and titanium-dioxide businesses, and its Iron Ore Co. of Canada unit. According to mining.com, the new unit will be led by Alan Davies who has a strong reputation and was apparently once Mr. Jacques’ rival for the CEO position. The newly structured unit generates ~$1.2b of EBITDA.

Does this ‘revamp’ sound somewhat familiar? Well, BHP Billiton (BHP) did something similar last year when it spun off its non core assets into the now publicly traded South32 (SOUHY). Could this be another example of follow the leader? Paul Gait, an analyst at Sanford Bernstein, certainly thinks so:

To us, this seems like a portfolio of unwanted assets that could be ready for a spin-off. To us, this division looks a lot like the South32 assets previously in BHP’s portfolio. Interestingly, coal assets are included. We know that Rio has been deprioritising the coal assets for quite some time and we think they are looking to exit coal mining, just at a time when BHP and Glencore expressed their interest in building their coal exposure at the bottom of the cycle.

Not everyone agrees with that sentiment though – here is RBC’s analyst Tyler Broda’s take:

There will definitely be assets in the Energy and Minerals division that are not as core,” he said. Yet, with Rio’s reliance on iron ore for earnings, there may be “benefits from maintaining some of these other potentially counter-cyclical commodities like uranium.”

With a phrase like ‘there may be benefits’, that surely doesn’t feel like such a ringing endorsement. Others believe the asset mix to be too ‘quirky’ for investors as a standalone company and instead believe the unit represents businesses that require fixing in order to be sold. Interestingly, despite the initial skepticism and negativity, South32 has actually recently outperformed both Rio and BHP.  The company has been able to generate cash despite the severe slump in commodity prices and its balance sheet is in better position than many of its rivals. In response to the market prices, CEO Graham Kerr has cut costs (and jobs) and is looking to improve efficiency elsewhere in the organization.

Perhaps Rio’s shareholders want to see their non core assets get a chance to shine on their own?

Disclosure: Author holds no position in any stock mentioned

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