August 6, 2013 / 7:25 PM / in 4 years

Three bidders out as Rio faces lackluster Canadian sale: sources

LONDON (Reuters) - Three big-name bidders for Rio Tinto’s (RIO.L) majority stake in Canada’s largest iron ore producer are now out of the running, sources familiar with the talks said on Tuesday, after offers came in well below the mining group’s targets.

The sources said private equity firm Apollo, which had been working with Canadian pension fund CPPIB, rival Blackstone (BX.N) and commodity trader and miner Glencore (GLEN.L) were no longer in the race after a second round of bids last month.

The low offers, at a time when dozens of mining assets are for sale and demand for steelmaking commodities is uncertain, raise questions over the future of a sale that could still take months to tie up - should Rio decide to push ahead.

Rio has a handful of assets on the block as it battles to cut a $19 billion debt burden and meet cost cutting targets. Like other miners seeking to divest unwanted activities, however, it has found buyers unwilling to pay up and in June was forced to scrap the sale of its $1.3 billion diamond business, 15 months after it was first announced.

Rio appointed banks to sell its 59 percent stake in Iron Ore Company of Canada (IOC) earlier this year after deciding to focus its iron ore efforts on assets in Australia’s Pilbara region, where the world’s second-largest iron ore producer has lower costs and higher grades.

But the Canadian sale process has been complex, slow and - so far - disappointing, the sources said.

“They were very ambitious on price,” said one industry adviser. “And you couldn’t pick a worse time to sell.”

Rio surprised investors late last month with the sale of its majority stake in Australia’s Northparkes copper mine for $820 million to China Molybdenum (3993.HK) - an unexpected buyer at a price in line with what Rio was said to be seeking, despite a process which did not attract a raft of firm bids.

Yet bankers and analysts questioned on Tuesday whether Rio could do it again with iron ore and not sought-after copper.

“They thought they could repeat Northparkes and pull a rabbit out of the hat,” said one source familiar with the sale, adding that Rio had underestimated the complexity of IOC.

Another added: “I was skeptical and I remain skeptical”.

The sources said that, out of half a dozen suitors who had put in offers in the second round of bids in July, most or all had come in below Rio’s expected value of roughly $3.5 to $4 billion for its stake - a value based on steelmaker ArcelorMittal’s ISPA.AS sale of a holding in its own iron ore operations in Canada at the start of the year.

That value, however, was almost double some estimates, with sources putting a realistic price at closer to $2 to $3 billion.

Two of the sources said only two bidders now remained as serious contenders, including Canada’s largest diversified miner, Teck TCKb.TO, which has long said it wants to add iron ore to its portfolio. One of the sources said the other remaining bidder could be a consortium of Chinese buyers.

The two sources and others cautioned, however, that the process was still fluid as Rio sought to drum up interest and hammer out a deal, having failed to carry out an initial effort to separate IOC’s infrastructure from its mining assets.

Glencore, Teck, Apollo, Blackstone and Rio Tinto all declined to comment.

Rio is due to report first-half earnings on Thursday.

Additional reporting by Jacqueline Range in Sydney and Euan Rocha in Toronto; editing by Tom Pfeiffer

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