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Rio Tinto starts slashing assets

Resource mining giant Rio Tinto (ASX: RIO) appears to be executing an aggressive programme of asset slashing at present. The aim of the sell off is to bring the company’s focus back to core activities including iron ore and copper production while also producing positive cash returns for company shareholders.  It follows Rio Tinto’s $3 billion loss for the financial year 2012 and subsequent announcement to cut costs to the tune of $5 billion over the next two years.

The most recent divestiture includes Rio’s stakes in the company’s Australian coal assets. This includes selling down up to 30% of the 80% holding it has in NSW based Coal & Allied, which it purchased in 2011 for $10.6 billion. According to the Wall Street Journal the sale of coal assets could bring in up to $3 billion for the company.

The news coincides with reports that coal exports in February were down 11.5% on January as a result of hostile weather conditions disrupting rail links and coal shipments for Rio Tinto and Yan Coal Australia (ASX: YAL).  Still; year-on-year coal exports for February are still up 13.4%; with total coal exports estimated to be worth more than $40.6 billion for the financial year to June.  This is a result of increased supply from coal miners including New Hope Corporation (ASX: NHC) and Whitehaven Coal Limited (ASX: WHC) both of whom have suffered from sinking share prices so far this year.

Whitehaven in particular has been heavily punished – its share price down over 40% from the start of the year. In March the company announced up to 40 jobs will be lost as cost cutting measures would mean fewer excavators operating in the mines.

The mines Rio is looking to dump produce thermal coal, mostly used for electricity production, which has seen prices for the commodity on a downward trend since September 2012 on higher supply and fears of lower long-term demand from Asia.

Foolish takeaway

Rio’s efforts to cut the fat and re-focus on core activities are prudent to create value for investors, particularly with such uncertainty around commodity prices. However given that the feeding-frenzy for acquisitions which dominated the last few years has long since gone, Rio Tinto and other coal miners could face a struggle to get rid of now only marginally viable operations.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Regan Pearson doesn’t own shares in any companies mentioned in this article.

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