By Sonali Paul and Eric Onstad
MELBOURNE/LONDON, Jan 28 (Reuters) - Miner Rio Tinto Ltd/Plc confirmed it may issue shares to help pay off $39 billion in debt and analysts said heavily indebted rival Xstrata might have to do the same.
Rio's shares in London slid 6 percent to 1,540 pence as investors bet it might have to raise between A$4 billion and A$8 billion ($5.3 billion) from a rights issue.
Media reports have speculated the group might raise as much as $7 billion.
Xstrata shares were down 9.8 percent to 618 pence at 1113 GMT as both underperformed a 2.1 percent fall in the UK mining index.
"They (Rio) will have to continue to sell assets, there's no doubt about that, even with a rights issue. But it would put them in a better position," said Tim Barker, resources analyst at BT Investment Management, which owns Rio Tinto shares.
Rio on Wednesday said it was looking at all options, including an equity raising, backpedalling after Chief Executive Tom Albanese had previously said that there was no current need to sell shares to meet the firm's target to cut debt by $10 billion this year.
"In order to preserve maximum flexibility for the group, the boards do not rule out the potential to issue equity as one of the options it has available," the company said in a statement.
The world's third biggest diversified mining group by market value has faced persistent rumours it might need to sell shares as it struggles to sell more assets to pay off debt.
Rio has announced several measures to reduce debt, including cutting jobs, slashing capital spending and expanding asset sales after bigger rival BHP Billiton scrapped a $66 billion takeover bid, blaming Rio's debt levels and sliding metals prices.
Rio has $8.9 billion in debt due in October 2009 and $10 billion due in October 2010.
The company had aimed to sell $10 billion worth of assets last year, including its U.S. coal business, as it tried to pay down debt it took on with its $40 billion takeover of Alcan in 2007.
Investors might warm to the idea of a equity issue since the company could be re-rated if the market was less worried about its capital structure, outweighing dilution from more shares, said analyst Michael Rawlinson at Liberum Capital in London.
A $5 billion rights issue would be 17 percent dilutive at current prices, but it would leave Rio's valuation based on price earnings ratios 25 percent less than Anglo American and 40 percent less than BHP, he said.
"A de-risked Rio is surely worth more, so we would keep it as our top pick," Rawlinson said in a note.
A rights issue was still regarded by Rio as a last resort, with debt refinancing also a possibility, he said.
XSTRATA
The announcement by Rio highlighted long-running concerns about rival Xstrata's debt position while investors also mulled over concerns that major shareholder Glencore might sell off some of its stake, analysts said.
"They're the other significantly indebted name in the sector, so there's plenty of scope to look at what Rio has said and read that through to Xstrata," said analyst Simon Toyne at Numis Securities in London.
"In terms of sources of profit in 2009, they're very exposed to the coal price and I think it will be difficult for them to make significant profits in any other of their businesses."
Xstrata declined to comment.
Although Xstrata does not have any major debt payments for two years, some investors are concerned that the global downturn means it may breach its debt covenants with banks.
Xstrata had net debt of $14.8 billion at the end of last June, the last time it reported the figure, and a gearing ratio of 34 percent.
The group said in October it received a new $5 billion revolving facility to refinance existing debt and therefore did not have any significant refinancing requirements until 2011.
If Xstrata issued shares, it would likely be more dilutive than one by Rio due to Xstrata's smaller size. Xstrata has a market value of $9.5 billion, less than a third of Rio's $35 billion.
Xstrata, which aggressively built itself through a string of acquisitions, might consider an equity raising so it could take advantage of cheap takeovers, Rawlinson said.
Another long-running concern that has hit Xstrata's share price is over liquidity at Swiss-based commodities group Glencore, which has a 35-percent stake in Xstrata.
Last month Glencore said it was considering buying back debt after Standard & Poor's cut its debt rating one notch to BBB-, the lowest investment-grade level.
Glencore, an unlisted commodities trader and metals producer, said at the time its current liquidity, representing cash and undrawn amounts under its committed bank facilities, exceeded $3.5 billion.
The firm said it had only a small portion of its overall funding secured against its stake in Xstrata and it had no intention to reduce the shareholding.
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($1=1.510 Australian Dollar) (Editing by Jason Neely)