Rio Sells the Crown Jewels to Survive

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Ferrous Metals, M&A Activity

Or so many are interpreting the announcement announced in Forbes today that Rio Tinto has sold stakes of up to 50% in many of its prized iron ore, copper and other mines in return for $ 12.3 billion in cash plus they are selling $ 7.2 bn in bonds convertible into shares to China’s Chinalco. With a debt mountain of $39 bn largely as a result of buying Alcan at the top of the market in 2007, Rio was in a desperate position to find additional capital but many analysts are worried selling significant iron ore assets to Chinalco, a Chinese State company, will severely weaken Rio’s hand in future price negotiations with Chinese buyers. Indeed it was opposition to just this move that prompted the resignation of the new chairman in waiting, Jim Leng, this week before he had fully taken up his new position. Leng clearly agreed with some other shareholders and analysts that the tie up did not make sense. The two parties have divergent pricing priorities. Rio wants to push prices higher, Chinalco as a government company, wants to keep them down. In the medium to long term this is bound to handicap Rio’s position in negotiating price increases, whatever they say to the contrary.

Among the many assets Rio is proposing selling to Chinalco are stakes in Escondida, Chile, the world’s largest copper mine in which Rio owns a 30% share (and BHP owns 57%) and a 15% stake in Rio’s Hamersley 110m tons/year iron ore business in Australia. Rio fought off a bid from BHP last year which valued the company and it’s assets at much more than they are being sold to Chinalco today. The deal still has to get past regulatory and shareholder approval, and the Australian authorities are said to be very wary of foreign government ownership of what are deemed to be national assets.

Rio’s timing is appalling, buying Alcan at what can now been seen to be the top of the market, fighting off BHP’s $66bn bid last year and now selling significant stakes in it’s business at a discount have not shown great judgment. But the board will be very aware they have $9 bn in debt to repay by October so something has to be done. They have indicated they would be open to higher offers from third parties, that may bring BHP back into the frame.

What may not be great news for the other Rio shareholders could be good news for steel consumers if the analysts concerns are realized. The relentless rise in iron ore prices over the last couple of years resulted in rapid escalation in prices for finished steel. Anything that could mitigate such volatility, such as more of an alignment of interests between iron ore producers and consumers, would be a welcome development for consumers everywhere.

–Stuart Burns

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