Jeremy Warner: Rio Tinto hunkers down

Outlook It seems like only yesterday that the mining finance houses were still riding the crest of the wave, with booming demand, commodity prices at record levels, deal making galore and talk of a twenty year "supercycle". And indeed it was virtually. In little more than six months, the industry's dreams have turned to dust, and share prices with them.

The speed of this turnaround is one of the most astonishing features of the current downturn. By preventing an early enough policy response to the gathering slowdown, the spike in commodity and oil prices was the straw that broke the camel's back, shattered all hope of a soft landing and plunged the world into recession. Already rocked by the credit crunch, American consumers took one look at the ever rising price of gas at the pumps, and collectively decided to stop spending and start saving.

In just six short months, the mining industry has turned from boom to bust, and now it is chopping jobs alongside everyone else. Out the door goes the 20 per cent dividend rise promised by Rio Tinto as part of its defence against an unwanted takeover bid from BHP Billiton. Costs and capital spending are being slashed and there is an ambitious $10bn disposal programme to get through by the end of next year in an effort to pay down debt. In these markets, that's a big ask.

Still, at $39bn, debt is already a bit lower than analysts had thought and assuming the asset disposal targets are met, there should be no need for a rights issue. Even at present, depressed commodity prices, Rio remains cash generative, with quite a bit of headroom said still to be left before the company is pushed into cash negative trading.

Companies can just about get away in this environment with either having too much debt or being cash negative, but to be both is certain death. Rio is taking all the right steps to avoid this lethal mix by conserving cash and paying down debt.

All the same, the company must be desperately regretting its $38bn all-cash acquisition of Alcan in July last year. For all of about six months, it seemed like a sensational deal.

Now it looks like an albatross. It's different this time are the most expensive words in the English language, the legendary fund manager John Templeton famously said. The commodities cycle has proved him right all over again.