Rio Tinto to undergo another impairment due to Alcan division

Despite efforts to put the ill-fated 2007 acquisition of Alcan behind it, the continued weakness in aluminum prices hints at yet another hefty impairment this year for Rio Tinto.

The Anglo-Australian company will look at the carrying value and goodwill of all its businesses ahead of the release of its annual results early next year. But analysts who met this week with Phillip Strachan, chief financial officer of the Rio Tinto Alcan division, say he conceded that consensus valuations are significantly different to the company’s book value for aluminum.

Aluminum and the $US38 billion acquisition of Canada’s Alcan at height of the market have long dogged Rio Tinto.

Chief executive Tom Albanese and outgoing chief financial officer Guy Elliott in February waived their right to annual bonuses after the company wrote off $US8.9 billion of its aluminum business for 2011, taking the value down to what it considered was the market level. The company in 2009 recognszed an impairment charge of $US200 million for the aluminum businesses, and the year before wrote down the value by $US7.9 billion as the metals environment weakened significantly.

Several analysts who met this week with Mr Strachan say they walked away convinced a further impairment will be necessary, despite the steps Rio Tinto is taking to slash costs, close unprofitable capacity and sell assets.

A spokesman for Rio Tinto in Melbourne declined to comment on the review process or the possibility of impairments.

Mr Strachan in a presentation released by the company said market conditions and the operating environment remained challenging for the aluminum industry, with the London Metal Exchange price having fallen 15 per cent in the first half of the year from the prior six-month period. About 25 per cent of smelting capacity outside of China is loss-making at current prices and costs, and inventories remain high, he said.

Rio Tinto, however, said demand remains strong, which paints a healthier long-term picture for aluminum. The company is targeting a margin of 40 per cent on earnings before interest, tax, depreciation and amortisation and is sticking with plans to exit or close assets.

Rio Tinto has identified a number of assets in Australia and New Zealand, as well as its Sebree smelter in the US, for sale or closure. Mr Strachan this week said it has also launched reviews of its Saint-Jean-de-Maurienne smelter in France and the Soral smelter in Norway, given critical power supply contracts negotiations that are under way.