HardAssetsInvestor

Written by Julian Murdoch  |

February 12, 2009

Rio’s Big Deal

Details

• Chinalco's bold bid and regulatory challenge
• Iron negotiations
• Spin and positioning

Rio Tinto will be releasing its second-half 2008 results today, at a time where much is going on. There's a lot at stake, and a lot of signaling expected.

Wheeling And Dealing

First in everyone's minds is "the deal" – Chinalco will be spending $19.5 billion to become an 18% stakeholder in RTP. This increases Chinalco's stake from its current level of 9%, which it bought back in January of 2008. In the age of trillion-dollar deficits, this might not seem like a big number, but it's huge. In fact (according to the Financial Times), this might be the single largest investment China has made in a foreign company. Ever.

All this week, there were stories of Rio Tinto talking with the Aluminum Corp. of China – Chinalco – about a deal that would allow Chinalco to up its current stake in Rio Tinto from 9% to just under 15% – 14.99% to be specific. Any higher would require special vetting from Australia's Foreign Investment Board. But Chinalco wanted board representation, which would require a 15% or more stake. Many analysts didn't believe that would come to pass because of the regulatory approval needed, but didn't see it as a deal breaker. With an 18% stake, Chinalco could have not just one but two seats on the board – it just remains for the Australian government to approve the deal. (Chile's government will also need to approve the deal.)

In this economy, with Rio Tinto being such a large Australian company, is there any doubt that the approval won't eventually come? The government of Australia has a rare opportunity to prop up a huge Australian company at a time when they really need it, without spending a lot of Aussie taxpayer money.

Here's the problem: Rio Tinto is holding a lot of debt, around $38.9 billion of it. Most of that debt is left over from its 2007 takeover of Alcan that cost the company $38.1 billion, and a serious hangover from a time when credit was much easier to obtain and commodity prices were on the rise. This deal with Chinalco is one way for the company to work its way out from under looming payments. (Rio has a debt service of $8.9 billion due this October, with another $10 billion due in October of 2010.)

Of course, the Chinalco deal is not the only way. Rio's Chairman-elect Jim Leng quit after less than a month apparently over just this issue. It is thought that Mr. Leng preferred a more traditional secondary offering plan, rather than allowing Chinalco to directly up their stake, though in his official statement at the time, nothing specific about the deal was said:

Apparently, they did.

Rio has been working other deals – many other deals, in fact. And while not a fire sale, assets have been steadily falling off the balance sheet.

At the end of January, Rio Tinto announced it was selling its Corumbá iron ore mine to Vale for $750 million, with an additional deal for undeveloped potash assets for $850 million just completed. Total Vale deal amount? $1.6 billion.

And Vale isn't the only competitor eyeing Rio's assets. BHP Billiton, though it dropped its takeover bid back in November due to worries about the credit crisis, says that CEO Marius Kloppers might still be interested:

On the aluminum side of things, Amcor Limited stated it may buy part of the Alcan Packaging unit.

What else is up for sale?

No one really knows. Rio has reportedly had outside interest in its borates and talc businesses for the past year, but no formal deals have been announced as of yet.

And though the company says no, there are analysts who think that Rio's stake in Australia's Coal & Allied Industries (worth $3.7 billion), as well as its stake in Energy Resources of Australia (a uranium miner), would be a quick and easy way to raise the needed debt relief.

The difficulty comes from Rio wanting (needing) to get good prices on any assets it sells, and in this difficult credit market, those deals may not be available. And with the just-announced infusion of capital from Chinalco, they may not be needed.