Will Rio Tinto Take Huge Alcan Writedown?

Includes: AL (defunct), RIO
by: FP Trading Desk

Rio Tinto Ltd. (RTP) could post a big writedown on its Alcan (NYSE:AL) assets of $5-billion to $7-billion, according to UBS Securities analyst Glyn Lawcock. As a result, the company's equity value could decrease and leverage could increase.

London-based Rio bought Alcan for $38-billion last year, well before aluminum prices began their drastic decline. Falling prices could lead to an impairment charge on the Alcan assets, Mr, Lawcock noted, as could a deferral or cancellation of some of Alcan's growth projects.

If that happens, Rio would obviously have lower earnings when the writedown is announced. But Mr. Lawcock wrote that the impact could increase future earnings forecasts because there would be lower depreciation, and therefore lower tax, in later periods. He said that an Alcan writedown on its 2008 results could actually reduce depreciation by $240-million in 2009, and therefore increase earnings by $170-million that year.

If Rio wrote down $5-billion to $7-billion, Mr. Lawcock wrote that the company's book value would fall 15% to $33-billion, or $25.60 a share. That would increase the company's price-to-book ratio to 1.1 times from its current level of 0.72 times. That is still below its average of about 1.5 times since 1990.

The impairment could also raise the company's gearing (or leverage) from 50% to 55% at the end of 2008 as its equity value decreases, he noted.