Rio Tinto plc
(RTP) has decided to exercise its warrants in Ivanhoe Mines Ltd. (IVN) for $393 million. Rio will acquire 46.03 million shares for $8.54 per share, which will increase its stake in Ivanhoe by 22.3%. On closure, Rio’s stake in Ivanhoe will be 29.6% with 144.66 million shares. Rio has an option to exercise warrants up to 267.8 million shares with the ownership of 44% in Ivanhoe.
 
The primary reason behind the exercise was the infusion of cash into Ivanhoe to help it develop the Oyu Tolgoi project together with Rio, the production of which will begin in 2013. Rio formed a joint venture with Ivanhoe in 2009 to develop Oyu Tolgoi’s copper and gold complex.
 
The ongoing investment program continues to deliver volume growth. In December 2009, Rio and BHP Billiton Ltd. (BHP) concluded definitive agreements to establish the Western Australia Iron Ore Production joint venture, which is expected to generate cost synergies of $10 billion. These agreements are also a milestone in delivering significant additional value to shareholders.
 
Rio is aligning its production levels with current demand, which is improving based on a modest economic recovery. In 2009, Rio took various measures to counter the downturn in the global economy and the sharp decline in commodity prices. Debt reduction and production cuts were a few of them.
 
Rio’s debt level had increased significantly as a result of the acquisition of Alcan Inc. in October 2007. The company reduced its net debt by $6.5 billion during 2008 to $38.7 billion and almost halved it to $18.9 billion at the end of 2009.
 
The primary tools for debt reduction for Rio are divestiture and generation of additional free cash flow following reduced capital and operational expenditure. A total of $14.8 billion from a right issue was another reason for the decrease in net debt during 2009. A total of $8.8 billion has been generated since 2008 through divestitures.
 
More divestments are in the offing in the near term. There was a significant amount of reduction in capital expenditure during 2009, and the company is targeting a further decline in 2010.

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