As discussed earlier in the series, Rio Tinto (RIO) has reduced its annual dividend and scrapped its progressive dividend policy.
While dividend cuts by Freeport-McMoRan (FCX) and Glencore (GLNCY) were reactionary measures, Rio seems to have taken a more proactive approach. Chairman Sam Walsh admitted the same in an interview with Bloomberg. Walsh also said that the company was on the “front foot.”
Copper mines are one asset that RIO could look at. This is due to copper’s better long-term outlook compared to iron ore and aluminum.
Currently, Rio Tinto is not a major copper producer. Though the company is building the Oyu Tolgoi mine to supplement its copper portfolio, its copper production is only a fraction of that of its rival BHP Billiton (BHP). In its 4Q15 earnings call, Rio Tinto hinted at possible acquisitions in the copper side of the business.
In his interview with Bloomberg, Walsh also highlighted the possibility of financial distress flowing to some of the major mining companies. Apparently, Freeport has one of the weakest balance sheets in the industry, with debt of ~$20 billion. Also, Freeport’s Tier 1 copper assets could interest Rio Tinto.
Replying to a question on the opportunity to buy some of the distressed assets in the market, Walsh said during the company’s 4Q15 earnings call, “Right now, well, the distressed assets that are out there, they’re distressed for a good reason – high cost, low quality, no infrastructure, people trying to get rid of.”
This is where miners such as Freeport, who are looking at selling their assets, will face a problem. It’s a buyer’s market, unlike a few years ago, when sellers played hardball and got higher prices for their assets. Now, the problem is that buyers such as RIO are looking at Tier 1 assets, which are generating cash even at current commodity prices.
Freeport may have to put some of its crown jewels on the block to raise cash. Otherwise, the company’s asset sales program could go the same way as its now abandoned energy initial public offering.
Meanwhile, asset sales are not the only challenge facing Freeport. The company is grappling with several other issues, which you can explore in An Investor’s Guide to Freeport-McMoRan’s 2016 Outlook.
Investors looking for diversified exposure to the materials sector can consider the iShares US Basic Materials ETF (IYM). Almost 12% of IYM’s holdings are invested in metals and mining companies.