Rio Tinto's selling, but who's buying?

HONG KONG/SYDNEY (Reuters) - Mining giant Rio Tinto (RIO.L) is hiving off assets to pay down $40 billion in debt after BHP Billiton withdrew a $66 billion bid, but in these turbulent times, who's buying?

Bankers and analysts say the world's largest miner BHP (BHP.AX)(BLT.L), Brazil's Vale (VALE5.SA)RIO.N, Switzerland's Xstrata Plc (XTA.L) and China's aluminum giant Chinalco, parent of Chalco (2600.HK) (601600.SS), are all eyeing Rio's diverse collection of assets.

Most have the cash to pounce on any near-term opportunities.

"The two with the most cash, BHP and Vale, they're definitely looking at the situation," one Hong Kong-based resources banker at a Wall Street firm told Reuters.

"Xstrata is still highly leveraged. Its stock has taken a beating -- it'd be interested, but has less ability to do a big deal," the banker said.

Neil Goodwill, analyst at Goldman Sachs JBWere, reckons the premise behind a BHP/Rio deal highlighted the strategic benefit of combining the two firms' iron ore assets in Australia's Pilbara region, and Rio should look to capture those benefits.

"For BHP, operating the assets, we believe, would be a must; for Rio, extracting cash for a 50/50 joint venture may ease its current debt position," Goodwill wrote in a report.

"We believe this deal could add significant value for both shareholders and solve some of Rio's pressing debt issues."

Rio (RIO.AX) is lumbering under the weight of its debt load, brought on by its $38 billion buy of aluminum producer Alcan last year. It has already cut its forecast iron ore production estimates for 2008 and 2009 to around 175 million tonnes and 180 million, respectively.

Rio is now axing 14,000 jobs, cutting capex by more than half, and hiving off prized assets to give investors confidence in its balance sheet as a stand-alone entity.

But who will buy what remains unclear.

There is persistent talk in the market that BHP wants Rio's 30 percent stake in Escondida, the world's biggest copper mine, for $4-$6 billion -- a prized asset that was one of the reasons BHP bid for Rio in the first place. BHP already operates the mine.

"Clearly, Rio is in a bit of strife and selling Escondida would get a decent price from BHP," said ANZ senior commodities analyst Mark Pervan.

And analysts say Rio's mineral business that produces salt, talc and borates, could fetch $1 billion.

French industrial minerals group Imerys (IMTP.PA), Canada's Teck Cominco (TCKb.TO) and buyout firms such as First Reserve and Apollo Global Management are reported to be interested, but no deal has emerged. Private equity players like Apollo and Bain Capital have also been mentioned as potential suitors for Rio's $5 billion packaging business.

Rio could also sell stakes in the Grasberg copper and gold mine in Indonesia, uranium mines in Australia and Namibia, its 75 percent stake in Coal & Allied Industries Ltd (CNA.AX) or the 68 percent stake in uranium miner Energy Resources of Australia Ltd (ERA.AX).

Analysts say volatile markets mean clarity on pricing is still missing, but Rio will have to move fast to shore up its balance sheet.

On Monday, Australia's government cut its estimates for production of its two biggest export earners, iron ore and metallurgical coal, by 15.5 percent and 5 percent respectively, reflecting a sharp contraction in demand from steel makers reeling from the global financial crisis.

HERE COMES CHINA...AGAIN

Some bankers say that of the potential bidders, China's state backed aluminum giant Chinalco could be the most aggressive as it seeks to satisfy China's hunger for natural resources, and earn global prestige and clout.

UBS says Chinalco, which plans to lift its stake in Rio to at least 14.99 percent, could seek part of Rio's Gove bauxite and alumina facility in Australia, which could fetch around $5 billion.

And this month, sources told Reuters that Rio's Chinese aluminum joint venture partner, Qingtongxia Aluminum, is set to be taken over by state-owned China Power Investment Corp to form China's second-biggest producer of aluminum after Chalco.

But China's hunger for Rio assets in Australia may hit roadblocks next year as Canberra seeks to protect its resources from foreign ownership.

Australia fears Chinese control of too many local assets will drive down prices to benefit Chinese state-owned customers. And China faces its own problems, with concerns that growth could slow to below the pace needed to create jobs.

"This is not a panic selling situation," Ken West, a resource fund manager at Perennial Growth Management, said of Rio's position. "It's just that they have to be more proactive than they have been."

(Additional reporting by Nicholas Trevethan in SINGAPORE)

(Editing by Ian Geoghegan)