Rio scraps China deal, to sell shares

Bloomberg

refid:11806182 ilişkili resim dosyası

Rio Tinto Group, the world’s third-largest mining company, scrapped an investment from Aluminum Corp. of China in favor of raising $21 billion from a share sale and an iron ore venture with BHP Billiton.

The new shares will be sold at 1,400 pence each, 49 percent below Thursday’s close in London, raising $15.2 billion, the company said Friday in a statement. Shares of Rio and BHP both surged in Sydney trading.

Friday’s deals allow Rio to reduce $38.9 billion in debt without selling bonds and stakes in its largest mines to Chinalco, defusing a backlash from shareholders and politicians. The collapse of the China accord is a setback for the nation’s plan to secure supplies of materials to drive economic growth.

"The ability of Rio to put away the deal and not have to rely on Chinese financing is a huge positive in terms of the dynamics of the market today and in the future," said Tim Schroeders, who helps manage $1 billion at Pengana Capital. "You could say the Chinese ability to divide and conquer producers, and to have control over the market, has been lessened."

Rio shares rose 8.4 percent to A$72.49 at the 4:10 p.m. Sydney time close on the Australian stock exchange, their biggest gain since Jan. 27. BHP advanced 8.7 percent to A$38.18, its biggest gain since Nov. 25, when it abandoned a hostile bid for Rio, partly on debt concern. Rio will cut its debt to about $23.2 billion, the company said.

Widespread criticism

The deal Rio Chief Executive Officer Tom Albanese, 51, brokered with Chinalco, as the Chinese company is known, was criticized by Legal & General Group, the third-largest investor, and the Association of British Insurers, for not giving them the option to participate in the fund-raising. His Chinalco accord also spurred a Senate inquiry in Australia.

"The Chinalco deal was wrong in a strategic sense," said Prasad Patkar, who helps manage about $1 billion at Platypus Asset Management. "The market was right in marking the management and board down for trying to jam it down shareholders’ throats. But you have to give Rio’s new Chairman Jan du Plessis due credit for listening and pursuing alternatives."

Since Rio and Chinalco announced their accord on Feb. 12, stocks and metals have rebounded. The Bloomberg Europe Metals & Mining Index has jumped 41 percent, while the London Metal Exchange Index of industrial metals has risen 36 percent.

Rio dropped the deal after the improvement in financial markets, du Plessis said in a statement. "The financial terms of the Chinalco deal became markedly less valuable" and "our ability to raise a level of equity appropriate for our needs on attractive terms has improved considerably," he said.

Rio turned to du Plessis after its prior nominee, Jim Leng, resigned in February, less than a month following his naming, because of a disagreement about how to cut debt. Three days later it announced the Chinalco deal. Albanese said Friday he still has the support of the board.

Chinalco is "very disappointed" with the failure of its investment plan, President Xiong Weiping said Friday in a statement. The deal replaces the planned $19.5 billion investment from Chinalco, China’s biggest aluminum producer. The company, Rio’s biggest shareholder, will monitor the iron ore joint venture announced Friday by Rio and BHP, Xiong said.

Effects of stabilization

"The global capital financial market has stabilized and individual companies now can get back to the stock market to raise equity or bonds to strengthen their balance sheets," said Winson Fong, who helps manage about $2 billion at SG Asset Management H.K., adding that Rio’s decision won’t stop future Chinese investment overseas. Companies are "no longer desperate to find strategic investors," he said.

BHP agreed to pay Rio $5.8 billion to create the 50-50 venture, the two companies said Friday in a separate statement. The two companies may save more than $10 billion by combining their iron-ore assets in the Pilbara region of Western Australia. The two will continue to sell their ore independently through their own marketing groups.

"Employment is likely to grow as we expand our operations," Samantha Evans, spokeswoman at BHP, said when asked about possible job cuts at the iron ore operations.

BHP "played their hand pretty well," said Peter Arden, resource analyst at Ord Minnett, an affiliate of JPMorgan Chase. "It’s a neat solution for both companies at a time of falling commodity prices. To be able to unlock this kind of value is extraordinary."

Rio and Melbourne-based BHP may supply 75 percent of China’s imports of iron ore this year, according to Goldman Sachs JBWere Pty. China is the biggest steelmaker. Brazil’s Vale is the largest iron ore producer. Rio last month agreed a 33 percent drop in contract prices with steelmakers in Japan and South Korea.

Rio is cutting jobs and trying to sell assets to repay $10 billion of debt this year. It has total borrowings of $38.9 billion, incurred mainly through the 2007 purchase of Alcan. At $15.2 billion, the rights offering would be the second-biggest this year after HSBC Holdings, which sold $18.3 billion of stock in April. Rio will offer 21 Sydney-traded shares for every 40 already held at A$28.29. That’s a discount of 57.7 percent to the last traded price.