Rio kills off BHP deal

Michael West

October 6, 2010

THE biggest merger in Australian history is dead, with the board of Rio Tinto preparing to walk away from a $120 billion iron ore deal to join forces with rival mining company BHP Billiton in the Pilbara desert in Western Australia.
The aborted merger deal - which follows an unsuccessful $180 billion takeover bid for Rio by BHP two years ago - was expected to meet opposition from European and Chinese regulators concerned about the impact of the miners' stranglehold on global iron ore prices.
But the major reasons for Rio's decision appear to be its improving financial fortunes, pressure from shareholders and the conclusion that the deal favoured BHP.
Sources close to the Rio board confirmed Rio was preparing to tell BHP of its decision yesterday. Rio chairman Jan du Plessis had informed fellow directors on Monday night that he did not think BHP would object to Rio calling an end to the deal.
''They can't object to that,'' Mr du Plessis said. ''That's kind of us stating our investment preference. They will no doubt have their own measurements and I think that's fine.''
Although the market had speculated about the failure of the Pilbara deal since BusinessDay first foreshadowed its collapse in August, there had been no acknowledgement from either party that the merger was in trouble.
Now Rio, having canvassed the opinion of its major investors, is looking to save face.
''I think with regard to the JV and why it didn't succeed … we should simply work on the basis that both parties worked well and in good faith to make this thing work and both parties agreed, simultaneously, it wasn't possible.
''In short, I think we have a positive message we should spread … I would caution against trying to be too critical as far as BHP is concerned, or kind of denigrating them in any way. I'm not sure that gets us anywhere,'' Mr du Plessis told his fellow directors.
BusinessDay understands other directors agreed with the positive public strategy. One, Sir Rod Eddington, responded to Mr du Plessis, saying, ''In fact the opposite Jan. I think it blows up in our face''.
Besides needing the approval of regulators, the deal required approval from both BHP and Rio shareholders. And it was this which finally prompted the Rio board to move. Rio - whose iron ore production is roughly twice the size of BHP - stood to gain a $5.8 billion ''equalisation payment'' from BHP. This was no longer viewed as adequate.

When the deal was cut in 2009, Rio was heavily in debt and had fallen afoul of its Chinese customers thanks to its infamous fall-out with Chinalco.

Since then, Rio has cut its debt by almost 40 per cent, its share price is strong and it has struck a $12 billion iron ore deal in West Africa with Chinalco.

Chinalco eventually gets what it wants from Rio Tinto

Chinalco eventually gets what it wants from Rio Tinto
Chinalco is making good on Rio Tinto.

By Una Galani, breakingviews.com
Last Updated: 3:05PM GMT 12 Feb 2009

One year since its audacious dawn raid, the Chinese state-owned aluminium group is set to double its stake in the Anglo-Australian miner. Chinalco overpaid back then, but the holding made sure it was first port of call for a proposed $20bn (£14bn) rescue package for Rio.

In the new deal, the Chinese have agreed to buy US$7.2bn of convertible bonds, at face value, and spend $12.3bn on stakes of up to 50pc in a number of Rio's mining assets. If the bonds are converted into shares, Chinalco would double its total stake in the dual-listed miner to 18pc and get to nominate two directors to Rio's board.

The new investment helps dull the financial pain of buying at close to the peak of the market. Last year it paid $85 a share, based on current exchange rates. It is hard to translate the value of the mine interests into a Rio share price, but people close to the situation suggest the equivalent price for the new proposed investment package is more than $50 a share. That is well above Rio's current $27 share price, but this is meant to be a long-term investment.

Indeed, Chinalco didn't get into Rio merely in search of a financial return. The original investment was widely considered a spoiler for rival BHP Billiton's proposed merger with Rio. The Chinese authorities were openly hostile to a deal that would have created a much more powerful supplier of iron ore and other key commodities. The move by state-owned Chinalco probably helped scupper the plan.

China may be suffering now, but it will always be hungry for commodities. There is no better way to keep prices down than to keep supply ample. Chinalco's latest deal will put the country in a position to do exactly that. Providing the transaction doesn't get blocked by Rio's frustrated shareholders or the Australian foreign investment board, Chinalco will have extracted what it really wanted.

For more agenda-setting financial insight, visit www.breakingviews.com

http://www.telegraph.co.uk/finance/newsbysector/energy/4601828/Chinalco-eventually-gets-what-it-wants-from-Rio-Tinto.html

Rio in talks with Chinalco over £10bn cash injection

Rio in talks with Chinalco over £10bn cash injection
$40bn debt forces miner to consider link-up with China's state-owned giant
By Nick ClarkMonday, 2 February 2009

Rio Tinto is preparing for further talks with China's state-owned mining giant Chinalco over a potential £10bn cash injection to ease its mountain of debts.
FTSE 100-listed Rio, which admitted for the first time last week that it could consider a rights issue, has held negotiations over a potential investment from the Chinese in recent weeks. The group hopes that a deal could be announced as early as its full-year results next week as the latest step in its programme to reduce debts of $40bn. The group has pledged to cut that by $10bn this year.
It is understood that the talks have gone beyond preliminary negotiations, but nothing has been finalised. Details are unclear, but beyond lifting its existing stake, Chinalco could be issued with a convertible bond by Rio. Chinalco could also be interested in taking on some of its mines or take minority positions in some of its more valuable assets.
Rio declined to comment yesterday.
Chinalco has enjoyed a close relationship with Rio since it bought an 11 per cent stake in the group in a dawn raid last February, and it was thought to be keen to up its stake. Rio's boss, Tom Albanese, is interested in teaming up with the Chinese over iron ore projects, and there was talk of the two companies developing infrastructure in Australia last year.
The group is trying to raise funds to cope with its debts. Rio is the most highly leveraged of the mining giants on the London Stock Exchange's blue-chip index. The brunt of the debt was brought on with the $38bn acquisition of the US aluminium group Alcan at the top of the market in 2007. It has to refinance $9bn of debt in October.
Rio launched its planned asset fire sale last week as it offloaded two mines to Brazilian rival Vale in a deal worth $1.6bn. It announced on Friday that it had agreed to sell its Potasio Rio Colorado project in Argentina, and the Corumba iron mine in Brazil. Yet the group has struggled to raise enough interest for its assets as credit remains scarce and potential sellers have failed to come up with adequate offers. Insiders have said it is even willing to listen to bids for its 30 per cent stake in Escondida, the world's largest copper mine.
As well as the sale of "non-core" assets, the company is looking to bolster its savings with a dramatic cost-cutting plan and curb on spending. It intends to cut 14,000 jobs and reduce capital expenditure by $5bn next year.
On Wednesday, for the first time, the group announced it could raise money from shareholders. "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," it said.
The sector has been hit by the falling demand for commodities, especially from China. Rio's share price had been buoyed in the wake of a hostile takeover attempt by BHP Billiton in 2007, which would have been one of the biggest deals in corporate history. The $58bn merger collapsed in November when BHP walked away, blaming the worsening economic conditions and the fall in commodity prices. The shares plunged and are 76 per cent off their peak in May.
Rival Xstrata announced it would turn to shareholders to raise $5.9bn in a heavily discounted rights issue, to pay down its debts and buy a coal mine. Xstrata has $16.3bn of debt, but it does not need refinancing until 2011.

http://www.independent.co.uk/news/business/news/rio-in-talks-with-chinalco-over-16310bn-cash-injection-1523111.html