Thursday, 26 March 2009

The Chinalco Rio Tinto affair






The proposed acquisition of a 18% stake in Rio Tinto by Chinalco is starting to get more and more messy. The deal raises a number of issues and hence this post.

First the facts. Rio Tinto is an Anglo Australian mining giant. It is listed in the UK and in Australia (as separate companies, but managed and run as one). Its mines are mostly in Australia. Through acquisitions made at the top of the commodity cycle, it is saddled with $ 38bn debt in its balance sheet. Now with the financial crisis, it is in trouble. Cash is needed to repay tranches of the debt that fall due in October.

Step forward Chinalco. A Chinese state owned metals company. It has offered $ 19.5 bn dollars for minority stakes in iron ore, copper, and aluminium mines and a 18% stake in Rio Tinto itself. Rio's Board unanimously passed the proposal.

The deal has raised howls of protest form all sorts of people.

The UK shareholders are howling because it dilutes their stake in the company. While the price Chinalco is paying per share is higher than current prices, it is lower than what it was in the boom days. They want a rights issue. But there is no certainty that the rights issue will raise the cash that Rio requires. In fact it is very likely that it won't. Then what ?

The Australian shareholders are crying foul over the valuation. But then in today's market that's all they will get. No point in crying over what might have been in the boom days. They want asset sales. But that's what Rio is trying to do and there's no evidence that it can raise any better with anybody else.

The Australian public and the politicians are howling over an entirely different issue. They are scared of "China taking over Australia". This is plain nonsense. I can bet that if it was an American company or a British company, there would have been no protest. Just because Chinalco is state owned in China, there is yelling. This smacks of jingoism and many posts can be devoted just to trashing this fear. The Australian Competition authorities cleared the deal yesterday, but it is stuck with the Foreign Investment Review Board who will decide whether it is in Australia's "national interest".

End result , complete uncertainty. If the deal falls through, there will be serious trouble for Rio come October when a major debt repayment is due. In the process, their Chairman is going away and the man they announced as his successor also went away. They have now announced a new successor. No prizes for guessing where Rio's management attention is now. All this after the soap opera of last year of BHP Billiton's proposal to acquire Rio Tinto, which finally fell through as the stock market tanked.

Methinks that the deal would not have had anywhere near this chorus of objections, if the suitor was not Chinese. That's the real pity.

Neither the shareholders, nor the authorities have covered themselves with glory on this matter.

For more reading on this deal

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