Time to Cash in Your Rio Shares?

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Commodities, M&A Activity

Have you been wondering what happened to that deal for Chinalco to buy an 18% stake in Rio Tinto for $7.2bn via a convertible bond issue and take minority stakes in key mine assets for a further $12.3b? At the time, Chinalco was hailed in some quarters as the white knight riding to Rio’s rescue. There has been a great deal of noise coming from the shareholders, many of whom strongly object to the deal. But even the shareholders are not united. British shareholders are said in the FT to object because the deal ignores preemption rights and favors Chinalco over other shareholders. Australian shareholders object because they fear it will give a major client influence over pricing and minority ownership of strategic Australian assets. US investors are largely happy with the deal on the basis the Chinalco presence has added stability to the share price and supported an 80% bounce back this year.

According to the Sydney Morning Herald, Chinalco is willing to renegotiate parts of the deal, such as it’s rights to 30% of Rio’s iron ore output, beyond it’s underlying rights from taking 15% in the Pilbara reserves, and possibly dilute the shareholding from the proposed 18% to 15%. Chinalco would also support an Australian government objective of Australianizing the London based miner by insisting on more Australian board members and specifying more board meetings be held in Australia rather than London.

As it stands, Rio cannot survive without a cash injection of some sort. The group has $34b of debt to service, of which more than $18b is due for roll-over by the end of 2010, including $8.9b this October. It was felt by the board that the sums were too large to raise via a rights issue but with the share price nearly doubled since the lows, a ‘plan b’ is apparently being put in place whereby JP Morgan Cazenove is seeking shareholder approval for a $10b rights issue this summer.

The dark stalking horse is still BHP. Talks broke off last year as the markets collapsed and BHP decided it was not in their interests to continue. Officially Rio is prevented under the terms of their agreement with Chinalco from entering into talks with any other parties but reports suggest high level discussions have taken place which apparently center around combining the two groups iron ore assets in Pilbara, rather than a total merger with or takeover by BHP.

The deadline for an Australian Federal ruling is June 15 and for the deal with Chinalco, July 31 so expect a flurry of activity as the next eight weeks unfolds. With the world emerging from the recession, Rio’s assets look progressively more appealing and it’s mountain of debt progressively more manageable, as the share price illustrates only too well.

–Stuart Burns

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