Rio Tinto sheds constraints of Alcan acquisition

MONTREAL — Rio Tinto has finally shed the constraints of its costly Alcan aluminum acquisition, helping the world’s third-largest miner to triple its annual profit to more than US$14 billion in 2010.

MONTREAL — Rio Tinto has finally shed the constraints of its costly Alcan aluminum acquisition, helping the world’s third-largest miner to triple its annual profit to more than US$14 billion in 2010.

The Anglo-Australian miner, which reports its results in U.S. currency, said its net earnings for the year soared amid dramatically higher prices for its range of products, particularly coal and iron ore.

Rio’s aluminum group, headquartered in Montreal where an independent Alcan was based before its takeover, also turned around a loss by earning US$1.3 billion as prices rose by 31 per cent. Production was unchanged.

“There was pain to go through but we’re working with a transformed aluminum business,” Rio chief executive Tom Albanese said in an interview from London.

Rio’s US$38.1-billion acqusition of Alcan in late 2007 loaded the diversified miner with heavy debt, just as the world was entering a global economic crisis sparked by a credit crunch that made it difficult for companies to borrow.

The company was hurt because it paid top dollar for Alcan at the top of the market and was unable to sell non-core downstream businesses fast enough, Albanese said.

“That would have caused the financial effects of the Alcan acquisition to be worse than we would have expected.”

With markets improving and the total debt whittled down to US$4.3 billion from US$19 billion a year ago, Rio Tinto views the aluminum business as fitting into its long-term strategy of operating large, long-life, cost-competitive assets.

“But we still have work to do,” he said.

Rio Tinto plans to invest billions of dollars to modernize key Canadian facilities in Saguenay, Que., and Kitimat, B.C. The moves will increase production by using new technology to reduce hydro energy consumption.

Despite the economic crisis, the company said it has honoured all of its commitments made to the federal and provincial governments.

But instead of spending more than $50 million to renovate the Alcan division’s Montreal headquarters, it is considering moving to a new building that it would lease.

Local developers have been asked to submit proposals. A final decision is expected by year end. About 700 people currently work at the aluminum division’s global head office.

Higher prices accounted for 68 per cent of the 2010 profit.

Rio Tinto’s overall results were helped by robust demand for thermal coal in South Korea, India, Taiwan and China, strong demand for semi-soft coking coal as a result of rising demand for steel, and higher prices for iron ore.

Prices were higher for nearly all of the company’s commodities, including copper, molybdenum, gold and aluminum.

The company endured higher energy costs. This included absorbing a US$117 million hit earnings because low water levels in Quebec forced it to buy more power from Hydro-Quebec.

Albanese said prices and markets were stronger than he anticipated a year ago.

Canada also contributed to Rio’s overall results because Iron Ore of Canada benefited from a strong iron ore market, higher prices and reduced costs.

It also seized on recovering diamond prices and markets by realizing the first underground production at the Diavik mine in the Northwest Territories.

Rio Tinto employs 13,000 people in Canada. The Beauharnois smelter in Quebec closed during the recession and facilities in Arvida and Shawinigan are slated to close by 2015.

Albanese said he would like to expand the company’s presence in the country.

“I’d like to invest more in Canada in the years ahead, so I don’t want to constrain my view of Canada just to IOC, the Saguenay, northern British Columbia or Diavik diamonds.”

Asked if that means expanding into other products, he said those would be explored if opportunities arose.

The strong results prompted Rio Tinto to increase its dividend by 20 per cent to 63 cents, and buy back up to US$5 billion of its shares by the end of 2012.

About one to two per cent of its shareholders are located in Canada.

Going forward, Rio Tinto plans to focus on internal growth while seeking small acquisitions.

“The outlook looks pretty positive for the next year or so but we have to recognize that it’s going to be punctuated by volatility as we see a series of global economic challenges,” he said.

These include European sovereign debt, high unemployment and inflation in emerging countries.

Rio Tinto said cash generated by the business was 70 per cent higher than the previous year at $23.5 billion.

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