LONDON (Reuters) - Global miner Rio Tinto (RIO.L) (RIO.AX) has appointed investment banks Credit Suisse CSGN.VX and CIBC (CM.TO) to sell its majority stake in Canada’s largest iron ore producer, two sources familiar with the matter said.
Rio owns 59 percent of Iron Ore Company of Canada (IOC), but the world’s second-largest producer of iron ore has been focusing on its core assets at a time of sluggish demand and weaker prices.
In iron ore, this has meant concentrating on Australia’s Pilbara region, where it has lower costs and higher grades.
Rio’s new chief executive said last month the company would look for value from non-core assets. The company already has several businesses on the block, including its diamonds arm and aluminum assets in Australia and New Zealand.
“The historic performance has been inconsistent, and if Rio wants more bang for its buck, the Pilbara is lower cost than Canada, which is also lower grade,” said one industry source.
He said a deal could value IOC at $3 billion to $4 billion, putting the value of Rio’s majority stake at above $1.8 billion.
“For Rio, it makes sense. They tried to sell it six years ago, and it has never been a core asset. Now is not a bad time to sell,” one of the sources familiar with the matter said.
Rio’s move to sell its IOC stake follows steelmaker ArcelorMittal’s ISPA.AS sale of a 15 percent stake in one of its iron ore operations in Canada, raising $1.1 billion to help pay off debt. Arcelor sold the stake to a consortium including South Korean steelmaker POSCO (005490.KS).
While iron ore assets up for sale are plentiful at a time of escalating costs and uncertain economic prospects, most are early-stage projects with high infrastructure costs and associated risks - not producing mines. IOC, however, has been producing since 1954.
Though the list of potential buyers is not long, given the size of the operation, it could attract miners looking to grow in iron ore, including trader and miner Glencore (GLEN.L), which has taken a stake in Brazilian producer Ferrous, and Teck Resources TCKb.TO TCK.N, Canada’s largest diversified miner.
Vancouver-based Teck annually produces over 24 million tonnes of metallurgical coal and has long said that adding iron ore to its portfolio would give it more leverage in negotiations with steelmakers.
Both Teck and Glencore favor assets already in production.
“We still think (iron ore) is a good fit in our portfolio,” Teck’s CEO Don Lindsay, who began his career in the iron ore business, said last month. “The values have come down and also ... a few new assets have become available.”
A sale to Teck would result in a faster approvals process, as the deal would not be subject to review under the Investment Canada Act, which requires foreign buyers of a Canadian business or assets to prove ‘net benefit’ to Canada.
The Canadian government last blocked a foreign takeover deal in 2010, when it halted a $39 billion bid by mining giant BHP Billiton Ltd (BHP.AX) (BLT.L) for the world’s largest fertilizer producer, Potash Corp POT.TO POT.N.
Although ArcelorMittal’s Canadian sale was above the review threshold, the deal did not require this approval since it was only a minority interest in the asset. However, if Rio attempts to sell its entire 58.7 percent stake in IOC to a non-Canadian entity, the deal would be reviewed.
IOC is a leading supplier of iron ore pellets and concentrates. It also owns and operates the Quebec North Shore & Labrador (QNS&L) rail line to its shipping terminal and deep water port in Sept-Îles, Quebec.
The shares in IOC not owned by Rio are held by Japan’s Mitsubishi, which has a 26 percent stake, and Labrador Iron Ore Royalty Income Corporation.
A Rio spokesman declined to comment.
Reporting by Clara Ferreira-Marques in LONDON, Sonali Paul in MELBOURNE and Euan Rocha in TORONTO; Editing by Anthony Barker