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Rio sells down European aluminium stake

Rio Tinto’s (ASX: RIO) cost-cutting drive is continuing, with the latest inflow from a sale of its shares in Amsterdam-based aluminium company Constellium NV (NYSE: CSTM) for around $US330 million.

Since coming into office earlier this year, CEO Sam Walsh has embarked on a strict cost-cutting agenda as he seeks to maintain the company’s single-A credit rating. Mr Walsh, who took control of the company after a series of massive write-downs and mounting debt, has set a goal of US$5 billion in savings before 2015.

In the past year, Rio has sold off a number of projects and businesses, including its Eagle mine in the USA (US$325 million), Palabora (U$S373 million), two aluminium smelters in France, Northparkes copper mine (US$825 million), Clermont coal (US$1.015 billion) and now 19.3 million shares in Constellium. This makes Mr Walsh’s plan of paying down debt and making the huge savings on costly projects much more likely.

The problem for Rio is that many of the assets it’s now looking to sell are the legacy of its former management. Constellium and most of its aluminium businesses, some of which are proving very costly and are continually being written down, come from the company’s acquisition of Alcan – a Canadian aluminium producer it bought for $38 billion in 2007.

Although the company has had successes with its recent sales, the aluminium, diamonds, Iron ore of Canada (IOC) and Mozambique Coal businesses are all much larger sales and have been unable to impress suitors. Investors are watching closely to see whether Rio will be able to offload its IOC business, as it would fetch between $3 and $4 billion.

Foolish takeaway

Rio Tinto, along with rivals BHP (ASX: BHP) and Fortescue (ASX: FMG) have shrugged off concerns over their ability to deliver shareholder value in the long run and bullish investors have been rewarded with strong gains in the past six months. However for Rio and Fortescue, huge debts and an almost pure reliance on Chinese iron ore markets means they’re riskier alternatives to the more diversified BHP. It has a number of highly profitable divisions outside of iron ore.

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Motley Fool contributor Owen Raskiewicz does not own shares in the companies mentioned here.

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