Sitting Pretty at Rio Tinto

Chinalco, China’s top aluminum maker, is under increasing pressure to reorganize its $19.5 billion deal with the heavily indebted Australian mining company Rio Tinto. A revision of the terms is almost inevitable, and Rio has everything to play for, Breakingviews says. Rio Tinto’s shares have almost doubled since February when the agreement with Chinalco was struck. Rio’s position has already been modified by its newly installed chairman, Jan du Plessis, who insists that he won’t submit a deal to his shareholders if he thinks they will vote it down. The original agreement was two-pronged. Chinalco, Rio’s largest shareholder, agreed to inject $7.2 billion into the mining company in the form of a convertible bond. That would potentially double the Chinese group’s stake in the Anglo-Australian miner to 18 percent, enough to set off a review by Australia’s foreign investment watchdog. Chinalco also agreed to spend $12.3 billion on minority stakes in a range of Rio’s mining assets. With these investments, the Chinese were to get two board seats. Chinalco appears to be considering limiting its equity stake to 15 percent, but not giving up board seats or reducing its direct asset investments, Breakingviews says. That may address some concerns of Rio investors, but it also suggests the Chinese company is prepared to be flexible only in areas that won’t dilute its behind-the-scenes influence at Rio, the publication says. If Rio investors are concerned about Chinalco’s clout, they should demand that it make concessions on the other parts of the deal, for example, by taking smaller stakes in Rio assets or dropping a board seat, according to Breakingviews. There are about four weeks before either Rio or Chinalco need to show their hands. The Australian regulator isn’t due to make a ruling on the original deal until mid-June, and in the meantime Rio’s chairman is sounding out shareholders. A month can change everything in volatile markets. If Rio’s share price holds up, a rights issue remains a viable alternative, Breakingviews suggests. The other good news for Rio shareholders is that Chinalco seems determined to stay in the game, but probably won’t give enough ground to rule out a counterproposal from Rio Tinto’s rival Australian mining company BHP Billiton, possibly with others, Breakingviews says. For now, it says, that leaves Rio with plenty of options. source：dealbook.blogs.nytimes.com