Partial sale of Iron Ore Company of Canada by Rio Tinto possible: analyst

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MONTREAL - Any move by Rio Tinto to sell its stake in the Iron Ore Company of Canada would likely involve a minority stake much like ArcelorMittal recently did with its iron facility in Quebec, an industry analyst said Friday.

Jackie Przybylowski of Desjardins Capital Markets says the Newfoundland and Labrador-based iron producer is likely too large an acquisition for most miners.

"We believe the most likely sale, if there is one, would involve a minority stake similar to the recent 15 per cent stake in Quebec Cartier Mining sold by ArcelorMittal to a consortium led by (South Korean steelmaker) POSCO (and China Steel Corp.) for US$1.1 billion," she wrote in a report.

The assets are of a similar size with similar infrastructure and are also located in the Labrador Trough.

Published reports suggest that Rio Tinto's new chief executive Sam Walsh may be looking to sell its Canadian iron ore asset after investing $2.6 billion in the last decade without generating much volume growth.

Walsh told analysts on Feb. 14 that he is "looking hard at divestments" of non-core or underperforming assets.

"Now I am not confirming or denying any particular asset but we are going to take a very rational, a very logical, approach and quite frankly if there are people out there who value these assets more than we do then certainly we will move forward and negotiate that opportunity," he told North American analysts.

"I am not going to sell assets below their value. This is certainly not a case of fire sales. I need to ensure that they are not knee-jerk reactions."

IOC wouldn't confirm that it could be up for sale.

"Up to now it's only speculation," said spokeswoman Natalie Rouleau.

British-based Rio Tinto (NYSE:RIO) owns a 58.7 per cent stake in IOC. Mitsubishi holds a 26.2 per cent stake and Labrador Iron Ore Royalty Corporation (TSX:LIF) holds the remaining 15.1 per cent stake and receives a seven per cent gross royalty on all IOC iron ore sales.

Przybylowski expects the current ownership structure will be maintained but said Rio Tinto's entire stake could be worth $2 billion to $4 billion based on the valuation of the ArcelorMittal transaction.

If Rio Tinto sells its IOC stake, the buyer could also move to acquire Labrador Iron Ore Royalty Corp. or its stake in IOC resulting in a stand alone royalty company, she added.

The analyst doubts that Labrador Iron has an interest in holding a majority stake in the company or operating the asset, but said it could raise its ownership to 36.8 per cent, lowering Rio Tinto's stake to 37 per cent.

Toronto hedge fund Waratah Advisors sent a letter to the board of Labrador Iron Ore saying the company should consider selling the stake in IOC.

"Waratah is of the view that the public enterprise value of Labrador Iron Ore Royalty Corporation does not reflect the true value of the assets held by the corporation," it wrote in a letter dated Feb. 8.

It said IOC has been a "chronic underperformer" that has depressed Labrador Iron's share price. Production at IOC has averaged 14.4 million tonnes over the past five years, well below the 18 million tonnes of capacity and potential capacity of 23.3 million tonnes.

On the New York Stock Exchange, Rio's shares lost $1.96, or 3.65 per cent, at US$51.68 in Friday trading. Labrador Iron's shares gained 47 cents at C$35.65 in trading.

Organizations: Rio Tinto, Iron Ore Company of Canada, IOC ArcelorMittal Labrador Iron Ore Royalty Desjardins Capital Markets POSCO China Steel New York Stock Exchange North American Mitsubishi TSX Waratah Advisors

Geographic location: MONTREAL, Quebec, Toronto

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