Rio Tinto launches rights issue, warns outlook 'uncertain'

Diversified mining giant Rio Tinto has released a prospectus for its $15,2-billion rights issue, announced earlier this month after the company terminated a $19,5-billion investment agreement with Aluminium Corporation of China (Chinalco). The rights issue will enable the group to reduce debt, strengthen its financial position and “take advantage of future potential value-creating opportunities”, chairperson Jan du Plessis said in a letter to shareholders on Tuesday. However, the group cautioned that the outlook for the balance of this year remained “uncertain”. “The key driver of earnings in the second half of the year is expected to remain the pricing of the group’s key commodities, particularly iron ore, aluminium and copper. “While iron ore prices for the 2009/10 contract year have been settled with some important Asian customers (other than Chinese customers), there remains uncertainty in the pricing of spot iron ore, copper and aluminium,” Rio Tinto said. The 21-for-40 rights offer has been priced at A$28,29 for Rio Tinto Ltd shares and 1 400p for Rio Tinto plc shares. On Monday, the group's shares closed in Australia at A$73,23 on Tuesday and 2 900p in London. “In the current circumstances, the boards are of the view that the rights issues represent the best opportunity for the group to retain strategic flexibility and to preserve and grow long-term shareholder value,” Du Plessis said. In light of the “uncertainties” over the macroeconomic outlook, the group has decided it will not pay an interim dividend for the current financial year, although it does plan to pay a final dividend, “subject to satisfactory trading results”. The group expects that the total cash dividend payment for the 2010 financial year will be at least equal to that paid for 2008 ($1,75-billion) albeit over an increased number of shares. CHINALCO Rio Tinto announced the Chinalco deal in February, in an attempt to alleviate the mountain of debt that the company took on last year to buy Canada's Alcan. However, faced with shareholder opposition to the deal, as well as improving financial markets, Rio began discussions with Chinalco on amendments to their agreements. When the parties could not reach an agreement, the transaction was terminated, and Rio Tinto announced instead of June 5 that it would instead form an iron ore joint venture in Australia with rival BHP Billiton, and raise $15,2-billion in a share sale. Rio Tinto has since paid Chinalco a break fee of $195-million, Du Plessis said. The break up of the deal, as well as the proposed Rio-BHP joint venture, has drawn criticism from China, which is the biggest consumer of iron ore. However, Du Plessis said on Tuesday that the group is interested in working with Chinalco in the future. “Rio Tinto remains interested in potential future collaborations with Chinalco and continues to recognise the importance of China and building strong relationships there.” Together with the biggest producer of the steelmaking ingredient, Brazil's Vale, Rio Tinto and BHP Billiton control around three-quarters of global seaborne iron ore trade.