Rio Scraps Chinalco Deal for Share Sale, BHP Venture (Update3)

Rio Tinto Group, the world’s third- largest mining company, scrapped an investment from Aluminum Corp. of China in favor of raising $21 billion from a share sale and an iron-ore venture with BHP Billiton Ltd. The new shares will be sold at 1,400 pence each, 49 percent below yesterday’s close in London, raising $15.2 billion, the company said today in a statement. Rio and BHP surged in London and Sydney trading. Today’s deals allow Rio to reduce $38.9 billion in debt without selling bonds and stakes in its largest mines to Chinalco, defusing a backlash from shareholders and politicians. The collapse of the China accord is a setback for the nation’s plan to secure supplies of materials to drive economic growth. “The ability of Rio to put away the deal and not have to rely on Chinese financing is a huge positive,” said Tim Schroeders, who helps manage $1 billion at Pengana Capital Ltd. in Melbourne. “The Chinese ability to divide and conquer producers and to have control over the market has been lessened.” Rio rose 281 pence, or 10 percent, to close at 3,001 pence in London and BHP gained 99 pence, or 6.8 percent, to 1,555 pence. Earlier, BHP advanced 8.7 percent on the Australian stock exchange, the biggest jump since Nov. 25, when it abandoned a hostile bid for Rio, partly on debt concern. Rio will cut debt to about $23.2 billion, the company said today. ‘Wrong Deal’ The deal Rio Chief Executive Officer Tom Albanese, 51, brokered with Chinalco, as the Chinese company is known, was criticized by Legal & General Group Plc, the third-largest investor, and the Association of British Insurers, for not giving them the option to participate in the fund-raising. His Chinalco accord also spurred a Senate inquiry in Australia. “The Chinalco deal was wrong in a strategic sense,” said Prasad Patkar, who helps manage about $1 billion at Platypus Asset Management in Sydney. “The market was right in marking the management and board down for trying to jam it down shareholders’ throats. But you have to give Rio’s new Chairman Jan du Plessis due credit for listening and pursuing alternatives.” Since Rio and Chinalco announced their accord on Feb. 12, stocks and metals have rebounded. The Bloomberg Europe Metals & Mining Index has jumped 46 percent, while the London Metal Exchange Index of industrial metals has risen 35 percent. Financial Markets Rio dropped the deal after the improvement in financial markets, du Plessis said in a statement. “The financial terms of the Chinalco deal became markedly less valuable” and “our ability to raise a level of equity appropriate for our needs on attractive terms has improved considerably,” he said. Rio turned to du Plessis after its prior nominee, Jim Leng, resigned in February, less than a month after he was named, because of a disagreement on how to cut debt. Three days later the company announced the Chinalco deal. Both du Plessis and Albanese said today the CEO still has the support of the board. Chinalco is “very disappointed” with the failure of its investment plan, President Xiong Weiping said today in a statement. Today’s deal replaces the planned $19.5 billion investment from Chinalco, China’s biggest aluminum producer. The company, Rio’s biggest shareholder, will monitor the iron ore joint venture announced today by Rio and BHP, Xiong said. Balance Sheets BHP agreed to pay Rio $5.8 billion to create the 50-50 venture, the two companies said today in a separate statement. They may save more than $10 billion by combining their iron-ore assets in the Pilbara region of Western Australia, the statement said. The two will continue to sell their ore independently through their own marketing groups. The venture will require European Commission regulatory approval, which may take up to a year, BHP CEO Marius Kloppers, 46, said today on a conference call. The maintenance of separate sales and marketing operations by the two companies would make the deal less “onerous” than a takeover, Kloppers said, adding: “We are comfortable that the deal is achievable.” The venture should be blocked because it isn’t in the public interest, the World Steel Association said in a statement. The accord doesn’t allay the “far greater competition issues that we were and are still concerned about,” Director General Ian Christmas said in the statement. BHP “played their hand pretty well,” said Peter Arden, a resource analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co. “It’s a neat solution for both companies at a time of falling commodity prices. To be able to unlock this kind of value is extraordinary.” Falling Prices Rio and Melbourne-based BHP may supply 75 percent of China’s imports of iron ore this year, according to Goldman Sachs JBWere Pty. China is the world’s biggest steelmaker. Rio last month agreed to a 33 percent drop in contract prices with steelmakers in Japan and South Korea. “While this deal has been more than 10 years in the making, I believe it has been worth the wait,” Kloppers said, adding he had initiated talks for the venture with Rio. “If we combine these we can get very, very substantial production, development and financial synergies.” A Pilbara joint venture had been studied in 1999 and was a key driver behind BHP’s hostile takeover bid for Rio, Citigroup Inc. said in a report last month. Kloppers dropped the planned acquisition of Rio in November last year, citing turmoil in global markets, slumping demand for commodities and Rio’s debt. Western Australia Premier Colin Barnett said he is “not pleased” with the deal between Rio and BHP. The deal requires legislative changes that may take a year, he said. Synergy Savings “The synergies are there,” Chris Weston, an institutional dealer at IG Markets in Melbourne said by phone. He didn’t foresee competition concerns because BHP won approval in October last year from the Australian Competition and Consumer Commission for its hostile takeover of Rio. The cost of protecting Rio’s debt from default plunged. Credit-default swaps on Rio plunged 41 percent, or 125 basis points, the most in 18 months, to an intra-day low of 180 before adding 30 basis points to close at 210 by 4:10 p.m. in Sydney, National Australia Bank Ltd. prices show. The contracts, which decline as investor perceptions of credit quality improve, have fallen 79 percent since January, CMA DataVision prices show. “The best outcome for bondholders was if the Chinalco deal failed,” said Mark Bayley, an independent credit strategist based in Sydney. “It means there will be no additional debt.” Under the Chinalco’s plan announced Feb. 12, the Chinese company had agreed to buy $7.2 billion of convertible debt and pay $12.3 billion for stakes in some Rio projects. Rio said today it will pay Chinalco a $195 million break fee. Rio is cutting jobs and trying to sell assets to repay $10 billion of debt this year. It has total borrowings of $38.9 billion, incurred mainly through the 2007 purchase of Alcan Inc. Earnings Decline At $15.2 billion, the rights offering would be the second- biggest this year after HSBC Holdings Plc, which sold $18.3 billion of stock in April. Rio will offer 21 Sydney-traded shares for every 40 already held at A$28.29. That’s a discount of 57.7 percent to the last traded price, it said. Credit Suisse Group AG, J.P. Morgan Cazenove Ltd., Deutsche Bank AG, Morgan Stanley and Macquarie Capital Ltd. are acting as joint global coordinators on the rights issue. Rio joins companies including Xstrata Plc, the world’s fourth-largest copper producer, that have sold $45.2 billion of stock to existing investors, data compiled by Bloomberg show. The trading outlook for the rest of the year remains “uncertain,” du Plessis said today in a letter to shareholders. The company reported a 45 percent drop in first- quarter earnings to $1.6 billion. source：www.bloomberg.com