Rio Tinto commits to Chinalco

23 May 2009 | 07:09 Code : 19171 Geoscience events
RIO Tinto has pushed aside continuing criticism of its $US19.5 billion ($A25.6 billion...

RIO Tinto has pushed aside continuing criticism of its $US19.5 billion ($A25.6 billion) refinancing deal with Chinalco to say that it remains committed to delivering the "strategic" partnership with the state-owned group.But Rio confirmed that it continued to "seek feedback" from shareholders on the transaction and that it was aware of the continuing media speculation regarding possible alternatives to the Chinalco deal — one struck in February when the pall of the global financial crisis was at its most severe for resources companies.Rio shares bounced back yesterday from the drubbing suffered earlier in the week when speculation was running hot that it could abandon the Chinalco deal in preference for a heavily discounted — and heavily dilutive — rights issue. Its shares were the best-performed of the leading miners, rising $4.28, or 7.4 per cent, to $61.88.The rise was a response to the broader rebound in commodity prices and an acceptance by the market that while the Chinalco deal might well be unpalatable, it was at least a complete solution to Rio’s debt woes.The rebound in the group’s shares will nevertheless reignite the debate about the need for Rio to at least rework the proposed $US7.2 billion convertible note component of its deal with Chinalco. It is through the 60-year notes that Chinalco can double its interest in the group to 18 per cent. The notes are to be issued in two tranches, one of which has a strike price of $US45 a share. That was a big premium to Rio’s price when the deal was announced but is now at a discount (based on the ASX-listed shares). The notes also carry what can now be seen as an overly generous coupon rate of up to 9.5 per cent.The group’s mainly British institutional shareholder base has been clamouring for some of the action. Rio would face having to pay a break fee of $US195 million if it were to walk away from recommending the Chinalco deal. That represents a standard 1 per cent of the proposed transaction’s value. By continuing to cling to the deal, Rio is standing by the agreement with Chinalco that it not solicit any third-party competing proposal before completion.But the Rio board does have a fiduciary obligation to consider superior offers. That leaves the way in for BHP Billiton, which dropped its 3.4-for 1 scrip offer for Rio last year when the global financial crisis hit. Rio is now trading at a BHP ratio of 1.85-for-1.There has been speculation that BHP might look to bid Rio for certain assets, underwrite a rights issue by Rio or at least propose the two companies combine their iron ore operations in the Pilbara, the latter being subject to competition clearance.But to date, at least, Rio has maintained that it is the Chinalco deal that comprehensively tackles its 2010 and 2011 refinancing deadlines, as well as cementing a "deep relationship with a strategic partner".Federal Treasurer Wayne Swan has the whip hand in what happens next. He is due to rule on the deal by mid-June. At a minimum, he is expected to make any approval heavily conditional, with some observers suggesting he could roll out the inclusion of a $US5.15 billion stake in Rio’s Hamersley iron ore unit in the deal.The Committee on Foreign Investment in the US has cleared the issue to Chinalco of the $US7.2 billion convertible bonds, and the acquisition of a $US700 million stake in the Kennecott copper operations in Utah.

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