Is Rio’s cost-cutting good for shareholders?

Since January, when current CEO Sam Walsh replaced Tom Albanese, Rio Tinto (ASX: RIO) has been on a mission to cut costs and make the business profitable.

In the face of lower commodity prices, reduced demand and increased competition Rio’s new CEO has his work cut out for him. The last annual report showed that the company recorded $US14 billion worth of impairments and a $3 billion net loss.

Since then, Mr Walsh has been actively cutting costs through sales or divestments but it hasn’t been as easy as hoped. In the US, Rio sold its Eagle project and today it was announced it sold its two money-losing aluminum businesses to French utility company Electricite de France and Germany’s Trimet for an undisclosed amount. Jacynthe Cote, the CEO of Rio’s aluminum division said “the sale of these facilities underscores our strategy to streamline Rio Tinto Alcan, through the divestment of non-core assets, so that it is focused only on our lowest cost businesses”.

This follows a decision by the company to retain its diamond business, which proved too hard to sell, but Rio will be hoping for better luck with other sales. Rio’s Canadian operations are estimated to be worth $4 billion and have had a number of suitors show interest in the past month.

In addition, Rio’s Mozambique coal facility is also on the chopping block, but even after a $3 billion write-down, it may prove to be a tough asset to sell as the demand for coal weakens with the introduction of shale gas throughout some of the world’s biggest economies. The Mozambique facility also has the added pressure of conflict with the government and opposition party, and Mr Walsh said that “I would be hopeful that there is upside in the project”. Even if they cannot secure a full sale of the operations, a partial sale would still be beneficial.

Rio’s cost-cutting is essential if the company wishes to become sustainable in the near future, particularly with lower coal and iron ore prices. Currently the company derives 11.4% of its revenue from its uranium and coal division but hopes to reduce this figure with the sale of its Mozambique project. In addition the high-cost environment in Australia has made the company reconsider its operations and shareholders shouldn’t be surprised to hear of asset sales from its Queensland or New South Wales facilities.

Foolish takeaway

The cost-cutting across both energy and iron ore will allow Rio to become a more diversified miner in the future and freshen up the balance sheet leading into the next commodity boom. Rio will need the extra funds if it wishes to return to shareholders and take advantage of its most recent, fully operational Mongolian project. It also has a huge facility in Africa that could boast massive revenues for its iron ore business but it wouldn’t become operational until late 2015 because the project has yet to be approved by the Guinean government.

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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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