Demerger plan could net Rio Tinto £650m

Miner considers loading debt on to Australian spin-off company

Rio Tinto looks set to earn itself a £650m payday by loading debt onto its Antipodean aluminium smelters business.

The FTSE 100 miner has been reviewing the spin-off of the assets, which are run under the "Pacific Aluminium" banner, since October. Rio's aluminium operations have hurt the miner's finances in recent years.

Rio had hoped to raise money through selling shares in the subsidiary through a flotation, but it is thought that advisers Credit Suisse and Morgan Stanley have cooled on that idea.

Though economic conditions make a separate listing difficult, Rio Tinto is warming to a plan that would see a demerger of the business. This would result in a separate company quoted in Australia, with possibly a secondary listing in London, that would be owned by Rio's existing shareholders.

Though Rio chief executive Tom Albanese would not raise funds directly this way, he could load up to Aus$1bn (£650m) of debt onto Pacific Aluminium. This would reduce the value of the demerged business from an estimated Aus$5bn to Aus$4bn, but the debt would be used to pay Rio a one-off Aus$1bn special dividend.

It is thought that Rio would look for the demerger to happen in September this year. A source close to the company said: "Aus$1bn would be at the top end of what could be put on to Pacific Aluminium. But a demerger that creates a new public company is the base case, probably right at the end of the third quarter."

Falls in the price of aluminium has been the bane of Rio since it bought Canada's Alcan for US$38.1bn (£24bn) in 2007; billions have been written off as a result of the deal's poor timing. A spin-off of Pacific Aluminium, which includes a refinery and an unprofitable bauxite mine as well as smelters, would help clean-up the division.

A Rio spokeswoman said: "We are not in a hurry to divest these assets. It is maybe a case of waiting until the economic climate improves."

Mr Albanese might well be asked to update shareholders on these plans at the company's annual meeting this week. They will also be hoping for news on Rio's diamond business, which the board put up for review last month. Great rival BHP Billiton is also mulling a sale of its diamond operations, but potential buyers for either are thought to be few and far between. One possibility might be to merge the two diamond business, creating an industry champion.

Also holding an AGM this week is another great name in mining, Anglo American. This will give its board the opportunity to assess the mood of shareholders towards chief executive Cynthia Carroll.