6 Min Read
* Miners under pressure to focus on core assets
* No quick fix seen for assets in problem commodities
* Some sales seen put on ice, alternatives sought
By Clara Ferreira-Marques
LONDON, March 18 (Reuters) - The "for sale" signs which have been hanging for months over Rio Tinto aluminium assets and its diamond mines are symptomatic of a bigger mining industry issue.
The world's biggest miners, under pressure from investors to aggressively refocus sprawling portfolios, tackle debt and, potentially, return cash, have lined up billions of dollars of unwanted assets for sale, from aluminium smelters to nickel mines.
Trouble is, buyers are thin on the ground.
This is the case particularly for the unloved assets at the top of miners' for-sale lists. Leading producers are retrenching, smaller "juniors" are strapped for cash and even once-voratious Chinese buyers are becoming harder to please.
"There is a missing buyer universe. The mid-caps got consumed in the last deal boom and the juniors can't get finance," one senior industry adviser said.
Take Rio and BHP Billiton for instance, which Deutsche Bank analysts estimate could sell $27.5 billion of non-core, producing operations, plus a further $7.5 billion of undeveloped assets and stakes in projects or joint ventures.
While a cluster of private investment funds is emerging to take advantage of depressed mining valuations, industry sources and analysts question whether even those led by big names such as Xstrata's departing boss Mick Davis or former JP Morgan dealmaker Lloyd Pengilly could have the financial clout to step in.
And, more to the point, whether they would want to.
"You have to tot up emerging market risks, relations with government, execution risk - plus other deals have been tough," said one industry source.
"Is it going to be a jamboree of chased deals? No. Is it worth gaining the trust of your investors (by being) ... seen to want to do something? Yes."
BHP Billiton has sold $4.5 billion of assets since last August and has told analysts and investors it is focusing on a divestment programme that includes some 10 assets.
The world's largest miner has not commented on the specific assets, but these are expected to include aluminium, manganese operations, non-core petroleum operations and the Pinto Valley mine in the United States.
But while few question the need for BHP and others to sell assets, its ability to seal more deals is less clear.
In part, this is because of the type of assets being sold.
Analysts have quoted BHP Chief Financial Officer Graham Kerr as saying this month he expected petroleum assets would be easy to sell - several parties were keen on in its stake in the Browse gas project in Australia, eventually sold to PetroChina.
Similarly, any assets in commodities that are in short supply are likely to attract buyers - copper, for example - or stakes in another rarity, unwanted iron ore mines.
At Rio Tinto, a stake in Canada's largest iron ore producer IOC is expected to attract suitors including Glencore, Canada's Teck - both hungry for the steelmaking ingredient - and even India's Vedanta.
But many of the assets on the block - Rio's and BHP's aluminium assets, for example - are in troubled industries seen to be unlikely to turn around any time soon.
Or, like Rio's diamonds operations, they are in niches too small for the majors, but where there are also few natural suitors. With the exception of heavyweights De Beers and Russia's Alrosa, other players in the industry are small.
Opportunistic private equity funds - so far only fringe players in the mining industry - have eyed the mines. Apollo and KKR were both among the suitors for BHP's EKATI diamond mine, eventually sold to what is now Dominion Diamond Corp.
The scale of the Rio diamond sale is unprecedented in that sector, but these buyers could struggle with a portfolio on the books at $1.3 billon and which includes the Argyle mine, undergoing a costly expansion.
"Investors are very careful of assets that require a lot of capex (investment) in order to be turned around," Gianmarco Migliavacca, a senior analyst at credit ratings agency Moody's said. "Investors will be picky, and as a result disposals in these structurally challenged commodities will be difficult."
The result could well be that many of the sales are put on ice, awaiting improved conditions. Some industry advisers say they are already advocating this strategy, even for majors which, like Rio, are under pressure to cut debt.
"Our experience is that assets that are sold in distress or in haste, you often repent at your leisure," outgoing BHP Chief Executive Marius Kloppers said last month.
BHP, for example, signalled that its nickel business - considered non-core by the market and where BHP has cut staff - had benefitted from good exploration results.
Analyst Paul Gait at Sanford Bernstein said miners would have to carefully consider why assets are on the block, potentially distributing unattractive businesses straight to shareholders if no cash buyer materialises - achieving the aim of keeping management attention on core assets.
"But spinning off to shareholders, of course, does not raise cash," Gait said. "If the objective is not portfolio restructuring but to fix the balance sheet, this doesn't help."