Tinto’s much-maligned aluminium business could be a surprise saving grace for the miner as iron ore prices soften, with the company’s cost-cutting drive set to produce strong cashflows and boost the chance of big returns to shareholders.
The turnaround in aluminium, which Deutsche Bank is forecasting will contribute $US2 billion ($2.1bn) of annual free cashflow to Rio by 2017, comes as chief executive Sam Walsh predicts an end to the Chinese overcapacity that has hobbled the industry in recent years.
While there is no hope of recovering the $US25bn of value wiped from the aluminium unit’s book value since Rio paid $US40bn in cash for Alcan just before the global financial crisis, some investors are positioning themselves for a rebound.
“We have shareholders on our portfolio because they believe our aluminium business is going to be very prospective,” Mr Walsh told the company’s annual meeting in Melbourne last week. “That’s their call, but it is an indication that people expect there will be improvement in the business.”
Deutsche Bank analysts also sense a change.
“The value of Rio’s aluminium business has been mentally written-off by the market,” analysts Rob Clifford and Paul Young said last week in a detailed report on the business using new information provided by Rio.
“We expect this to change in 2014, with the division close to completing the majority of its transformation.”
A focus on cost-cutting and the closure of high-cost assets led Rio to report a $US550m aluminium profit last year, when most analysts were expecting it to just break even.
After redoing its Rio numbers last week, Deutsche has boosted its 2014 aluminium forecast to $US955m this year, up nearly $US300m on its previous forecast.
“After years of generating negative cashflow, the long process of restructuring Rio’s aluminium division is about to pay off,” the analysts said.
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