BHP Billiton's iron ore operations in Western Australia.
Rio Tinto has decided to break off its proposed relationship with Aluminum Corp. of China, once valued at almost $20 billion, paying the Chinese state firm an agreed-to fee of $195 million, and instead issued new stock rights to bring in a gross of $15.2 billion for its plc and Ltd. entities.
Rio Tinto will use these funds to pay down the debt it took on to acquire Alcan, a healthy amount of which is coming due in October.
At the same time, the company cut a deal with former suitor to combine iron ore assets in Western Australia, a move that will provide Rio Tinto with $5.8 billion in cash.
The company said, however, that it “remains interested in potential future collaboration with Chinalco and continues to recognize the importance of China and building strong relationships there.”
The deal announced earlier this year, which would have given the Chinese firm an approximate 18% interest in the company and unspecified control over certain Rio Tinto properties, had been exceptionally controversial, especially in its home base of Australia, and was coming up for final review by that nation’s Foreign Investment Review Board.
Technical details
The company said the rights issues consist of 21 New Rio Tinto plc shares offered for every 40 existing shares at 1,400 pence per share and 21 New Rio Tinto Ltd. shares offered for every 40 existing shares at A$28.29 per share to raise approximately US$15.2 billion of gross proceeds, comprising about US$11.8 billion for Rio Tinto plc and US$3.4 billion for Rio Tinto Ltd.
Rio Tinto said the issues would enable it to meet its Alcan facility debt repayment obligations fully in 2009 and substantially in 2010.
As a result, it added, net debt will be reduced to about US$23.2 billion, exceeding the commitment made in December 2008 to reduce net debt by US$10 billion by the end of 2009.
The rights issues and debt repayments, it said, “will strengthen the Group’s financial position in a period of continuing uncertainty and allow it to take advantage of future value-creating opportunities”
Amending the Chinalco deal
In a statement, Rio Tinto said that “the transaction with Chinalco announced and recommended by the boards will no longer be pursued. Rio Tinto and Chinalco have discussed potential amendments to the transaction to address the improved financial markets; as well as shareholder and wider stakeholder feedback.
“Despite making good progress, a revised version of the original agreement has not been realized and those discussions have now ceased.”
Reaction in China
As is well known, China has a voracious appetite for resources to feed its own growth and its export engine. It has been acquiring raw material in a variety of ways all over the globe, using its huge cash reserve acquired from the U.S. trade deficit. Through both state-owned and private firms, China has been acquiring mineral resources from nations in central Asia, Africa and Latin America, and recently has been using loans to win multibillion-dollar oil deals with Russia, Venezuela, Kazakhstan and Brazil.
But because of the size of the deal and the importance of minerals to Australia’s economy, the Rio Tinto deal wasn’t as politically palatable as smaller ones, such as the recent approval for Minmetals Corp. to invest $1.21 billion to acquire assets from OZ Minerals Ltd., though that deal had to be revised to eliminate resources near military areas.
The Wall Street Journal reported that the deal’s failure was perceived in China as a blow to the nation’s prestige and that the press there lamented that business could not be separated from politics.
But the Journal also reported that Chinalco stock rallied 10% on the news of the breakup, the daily limit for Shanghai-listed stocks, while Rio Tinto stock had rallied in the past on news of the Chinalco deal and had fallen on rumors of a breakup.
Rio Tinto stock was up this morning as well, but only about 7%.
Iron ore deal
At the same time the rights issue was being announced, Rio Tinto and BHP Billiton said they had signed a non-binding agreement to establish a production joint venture covering the entirety of both companies’ Western Australian iron ore assets.
The joint venture will encompass all current and future Western Australian iron ore assets and liabilities and will be owned 50:50 by BHP Billiton and Rio Tinto.
“The joint venture is expected to unlock significant value from the companies’ overlapping, world-class resources,” the announcement said. “Both companies believe the net present value of these unique production and development synergies will be in excess of $10 billion (100% basis).”
“Substantial synergies” are anticipated to come from:
- Combining adjacent mines into single operations;
- Reducing costs through shorter rail hauls and more efficient allocations of port capacity;
- Blending opportunities which will maximise product recovery and provide further operating efficiencies;
- Optimizing future growth opportunities through the development of consolidated, larger and more capital efficient expansion projects; and
- Combining the management, procurement and general overhead activities into a single entity.
The joint venture will operate as a cost center and deliver iron ore, in equal volumes, to ships designated by BHP Billiton and Rio Tinto to sell independently through their own marketing groups.
In order to equalize the contribution value of the two companies, BHP Billiton will pay Rio Tinto $5.8 billion for equity-type interests at financial close to take its interest in the joint venture from 45% to 50%.
Senior management of the entity will be determined jointly on the basis of the “best person for the job,” the firms said, with broadly equal participation from Rio Tinto and BHP Billiton. The initial chairman of the non-executive owners’ council will be Sam Walsh, currently Rio Tinto’s CEO for iron ore, and the initial CEO of the production joint venture will be BHP Billiton’s president for iron ore, Ian Ashby. Future CEOs will be appointed by mutual consent.
Executive comments
Commenting on the joint venture, Rio Tinto Chairman Jan du Plessis said, “The joint venture will establish an unrivalled iron ore business with world-class assets and infrastructure. We believe it represents great value for shareholders and will create a business combination able to serve growing international markets with unparalleled efficiency.”
BHP Billiton Chairman Don Argus, said, “I am delighted that we are able to announce a transaction that can deliver significant real and quantifiable synergies to our shareholders. The combination of these two asset portfolios will unlock the scale benefits inherent in this world-class resource basin.”
BHP Billiton CEO Marius Kloppers said, “The synergies in this combination are so substantial that both companies have been investigating ways to combine these operations for more than a decade. I am delighted that we have found a solution that works for both companies.”
Tom Albanese, chief executive of Rio Tinto, said, “We have long recognized the natural fit of our two iron ore businesses and the industrial logic for bringing them together in order to unlock substantial synergies. We are very pleased that we have been able to realise this vision which offers value to both companies.”
