As boom has turned to gloom, commodities prices have dropped, demand has dwindled away, mining companies and the exchange traded funds (ETFs) that hold these companies have been hit hard.

The Economist reports that Rio Tinto has been one of the hardest hit and are taking the following measures to cope with its debt and current conditions:

  • It has started a fire sale of its assets to cover some of its $40 billion of debt; in fact, it sold its potash businesses in Brazil and Argentina to rival Vale.
  • Plans on laying off 14,000 employees and reduce capital expenditures by $5 billion this year.
  • They have started discussions with Chinalco, a state-owned Chinese aluminum maker who already owns 9% of the company, to purchase a convertible bond and raise its stake in the company top 11%.
  • The company has been attempting to unload Alcan, the packaging business that it recently acquired.
  • Speculators believe that they may need to unload their 30% stake in Chile’s Escondida, the world’s biggest copper mine.

It doesn’t seem like the mining giant has much of an alternative.  A big chunk of their debt will be called in this year and in the following year.  The future for the company seems somewhat bleak in that it has already been hit by a sharp fall in investment and will be worsened by any sale of its better assets.  All we can hope for is a turn around in the economy.

An ETF that could be influenced by Rio Tinto’s decisions is:

iShares MSCI Australia Index (EWA): down 12.1% over the last month; Rio Tinto is 1.6%.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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