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Rio Tinto freshens up its balance sheet

Rio Tinto (ASX: RIO) has agreed on the sale of its Eagle project in the United States for an estimated US$235 million in a bid to shore up its balance sheet as a result of low commodity prices taking their toll on profits.

Last year, Rio declared a net loss of $3 billion as a result of poor commodity prices, natural weather events, poor investment decisions and operational costs blowing out. We’ve seen BHP (ASX: BHP) and Woodside Petroleum (ASX: WPL) scrap plans for investment and cut costs by focusing on core business strategies.

New boss is good for Rio

Rio’s new boss, Sam Walsh, has been very active in his short term as CEO and has cut capital spending and taken action against very poor investment decisions such as the acquisition of coal assets in Mozambique, Alcan in Canada and now domestic coal mines such as Coal & Allied. Coal & Allied was only purchased 18 months ago but Rio is looking to diversify its holding and sell a 29% stake in the business with operates mines in the Hunter Valley, along with its Blair Athol and Clermont mines in Queensland. Mitsubishi (FTSE: MBC) has a 31.4% holding in Clermont and a 20% stake in Coal and Allied.

Why is it selling off?

Today’s announcement for the sale of Rio’s Eagle project to Lundin (TSX: LUN) is the result of Rio’s strategy to focus on core projects and receive a better cash flow in the short to medium term. Eagle project was not yet operational, with only 55% of the construction completed.

Currently Rio has a debt to equity ratio of 57% compared to BHP’s 43%, a modest but important difference. Rio’s heavily placed in commodity markets where pricing has been falling faster than expected and is tipped to go much lower in years to come. Cutting non-core projects and services allows Rio to focus on what it is good at and produce commodities at cheaper prices.

Foolish takeaway

Mr Walsh will attempt to drive down spending and improve efficiencies for Rio’s projects rather than invest so heavily in exploration and acquisitions. Mr Walsh is a glimmer of hope for many shareholders because he’s finally doing what previous management should have done two years ago. Foolish investors would be wise to keep their distance from this one until the financial year blows over and we can truly see the effect of lower commodity prices on Rio profit (or loss).

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Motley Fool contributor Owen Raszkiewicz owns shares in BHP.

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