CANADIAN PERSPECTIVE: About face by Rio Tinto

The balance sheet at Rio Tinto of London, UK, was looking rather red last year, sporting a $US38-billion debt. And ...

The balance sheet at Rio Tinto of London, UK, was looking rather red last year, sporting a $US38-billion debt. And the share price bottomed out last December when the global economic meltdown settled in and BHP Billiton dropped its takeover bid for Rio.


Then last February, China's Chinalco appeared and offered to pump US$19.5 billion into Rio. The deal would have combined Rio's aluminum producers including the assets of Canada's Alcan it acquired in 2007 with those of the Asian producer. Chinalco would have wound up with an 18% interest in Rio, US$7.2 billion in convertible bonds, two seats on the board and joint ventures in a number Rio's Pacific Rim iron, aluminum and copper assets. Rio shareholders disliked the deal from the start, and on June 5 the company said it is walking away from the deal.


The same day Rio Tinto and BHP Billiton signed a non-binding agreement to create a joint venture that will include all the assets of both companies' iron ore projects in Western Australia. The announcement came with the usual promises of synergy: the deal will unlock more than $100 billion in production and development synergies for the combined operations. The two companies also promised to share technology and R&D projects.


Also on June 5, Rio Tinto announced a fully underwritten rights issue that will raise approximately US$15.2 billion. The money will be used to make payments on the debt incurred for the purchase of Alcan, which was significantly US$38 billion. Perhaps Rio's deal with BHP Billiton is going to renew its financial vigour without incurring the wrath of investors.


The Chinese cannot be too pleased with Rio's about face. They are on a worldwide iron ore and base metal buying spree, seeking assets in Canada, too. They have the cash, and once the markets turn around it makes sense that they want equity in a variety of producers to secure supply.


If I may offer a prediction, the Chinese will be taking a long, hard look at a hostile takeover of Rio Tinto and/or BHP Billiton. Wouldn't that be something?


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