UPDATE 3-Rio Tinto overhaul plan dented as diamond sale scrapped

Mon Jun 24, 2013 12:04pm EDT

* Diamonds sale pulled after 15 months

* Analysts estimate business worth more than $2 billion

* Iron ore, copper, coal, aluminium assets still on block

* Tough time for potential bidders to raise funding

* BHP Billiton ahead in asset sale race

By Sonali Paul and Clara Ferreira-Marques

MELBOURNE/LONDON, June 24 (Reuters) - Rio Tinto Ltd has scrapped the proposed sale of its $1.3 billion diamonds business, denting its plan to divest mines as it tightens operations during an industry downturn.

The world No.3 miner has at least half a dozen assets on the block, aiming to pare $19 billion in net debt, cut costs and boost returns to shareholders, but buyers are unwilling to pay up given volatile commodity prices and rising debt costs.

Rio had said last year it could sell its diamond unit - mines valued by analysts at as much as $2 billion - but which Rio said no longer fit its profile. Yet it struggled to find suitors for operations spread across Canada, Australia, India and Zimbabwe - or to secure enough appetite for a listing.

"In resource land it's just a little bit tough at the moment," said Paul Xiradis, chief executive of fund manager Ausbil Dexia, which owns Rio Tinto shares.

Rio is not alone in struggling to sell assets. Barrick Gold was unable to pin down a sale of a stake in African Barrick Gold to state-owned China National Gold in January, and Peabody Energy and Brazil's Vale have given up trying to sell some mines in Australia.

Rio Tinto's new chief executive, Sam Walsh, had hosed down expectations for a sale of the diamonds unit.

"This is not market day at the bazaar. I'd be quite happy to keep it," Walsh was quoted saying in an interview with The Daily Telegraph newspaper this month.

Analysts said the decision to keep the assets was not a shock and - though disappointing for some investors - ultimately less critical than a failure to sell other, larger assets on the block, including Rio's majority stake in Iron Ore Company of Canada (IOC), the country's largest iron ore producer.

"Both the (diamond) mines that really count have a fairly short life and they will generate a lot of cash, so in many ways Rio is better off hanging on to the business," analyst Des Kilalea at RBC Capital Markets in London said.

"IOC is the asset everyone is really looking for (Rio) to sell. Depending on valuations, that would be the one to get significant cash flow."

LAGS ARCH-RIVAL

Rio Tinto put the diamonds arm up for sale in March 2012, soon after rival BHP Billiton put its smaller diamonds unit on the block. BHP won the race to find a buyer, selling to Harry Winston, now called Dominion Diamond Corp.

The Canadian company is co-owner of the Diavik mine with Rio Tinto and had expressed interest in buying Rio's 60 percent stake in the mine, but was not interested in the rest of its spread-out diamond business.

Rio's diamond unit - a mere 1 percent of revenue estimates - reported a $43 million loss last year, down from a profit of $10 million a year earlier. Apart from Diavik, its main mine is Australia's Argyle, famous for its pink gems.

While BHP has racked up more than $4.6 billion in asset sales over the past year, over the same period Rio has only managed to sell its Eagle nickel mine for $325 million.

"Debt costs have blown out by 200 basis points in the last couple of weeks. That makes it pretty tough if you're trying to finance an acquisition," said one resources banker.

The assets BHP has sold have mostly gone to Japanese and Chinese bidders. Asian buyers are seen as most likely to be able to complete deals, which could help Rio Tinto at least on the sale of its Australian coal assets.

It has attracted interest from Indian conglomerate Aditya Birla Group, Coal India and Japanese trading house Marubeni Corp for its Clermont coal mine and a 29 percent stake in its Coal & Allied business.

China's Shenhua Group denied reports that it was going to bid. A senior Shenhua official was quoted in official publication Energy saying Rio had offered the coal assets, but Shenhua turned them down because they were too expensive.

Rio, which hopes to seal some sales soon, is also looking to sell its Pacific Aluminium arm, on the block since 2011 and its Northparkes copper mine in Australia, as well as the majority stake in IOC.

IOC has attracted a wide range of interest and sources with knowledge of the matter said on Monday that half a dozen suitors remained in the running ahead of a deadline for final bids next month, as Rio sought to keep everyone involved - but complex marketing arrangements and a strategic port could prove tough.

Canada's Teck, Glencore and private equity house Apollo are among those still eyeing up the asset, along with Chinese and other buyers. Sources familiar with the matter, however, questioned final offers and said Rio could struggle to raise the $3.5-$4 billion it is seeking for its 59 percent.

The sale of its Northparkes mine, which could fetch $800 million, is seen as the easiest to seal.

However people familiar with the situation said there is only one bidder left, OZ Minerals Ltd, and it is under pressure not to overpay. Final bids are due in the coming days.

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