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Rio Tinto’s balance sheet woes

The selling ability of some of Rio Tinto’s (ASX: RIO) biggest assets is proving to be more difficult than first thought.

Since the beginning of the year CEO Sam Walsh has been on a collision course with excessive costs and non-core assets, putting them all on the chopping block. This comes as global commodity prices begin to wane and for many, supply increases.

For some time Rio’s Canadian operations have been up for sale for an estimated $4 billion and today, Vedanta Resources (FTSE: VED) said that it will not be placing a bid for the project. It is speculated that the project would add an unnecessary debt burden on the company which already has troubled balance sheets. However, it’s not all bad news for Rio, which has already had offers from other parties, including Glencore Xstrata and Blackstone Group (NYSE: BX).

In the past few months, Rio has sold its Eagle project in Michigan, suspended exports from its Mozambique coal facility (which it hopes to sell) and welcomed the pull back of its huge gold and copper project in Guinea. However, suitors may be harder to find than was first expected.

Despite having its diamond business up for sale, the company was unable to sell and was last month forced to keep it. No doubt, this would have stunted Mr Walsh’s plans to focus on core projects and freshen up the balance sheet.

After reporting a $3 billion loss in the most recent half year, Rio is hoping to bolster its balance sheets and give back to shareholders throughout the next four years, when we are expected to see increased competition on global commodities, which will only push prices down.

Foolish takeaway

Investors hoping for a turnaround in Rio’s profit and loss for FY12 could be pleasantly surprised, but is it worth the risk? Even if it does get rid of poorly performing assets, the prices of commodities is only going downwards and any effect of new capital won’t be seen for at least another year, in which time the company could be expected to drop.

Remember you don’t have to buy it, there are so many other good companies available that pay higher dividends, have less debt and provide a sustainable future for shareholders.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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