Rio Tinto Group, the world’s second-largest mining company, raised its bid for Riversdale Mining Ltd. (RIV) by 3 percent to A$3.9 billion ($3.9 billion) as share purchases by steelmakers threaten to scuttle the deal.
“The choice for Riversdale shareholders is clear - accept the $16 or $16.50 on offer or risk seeing their share price return to pre-bid levels,” Doug Ritchie, Rio’s energy chief executive officer, said in the statement. Rio will pay A$16.50 a share, 9 percent more than Riversdale’s close yesterday, should more than half its shareholders accept, Rio said.
Gaining control of Riversdale’s Mozambican projects would boost Rio’s reserves of steelmaking coal as prices double. Rio says it will settle for a controlling stake as Sydney-based Riversdale’s two biggest holders, Mumbai-based Tata Steel Ltd. (TATA) and Cia. Siderurgica Nacional SA, increased their stakes to strengthen their hand in negotiations for supply contracts.
“Rio are showing some goodwill to other parties who may be less convinced about Rio entering the fray,” said Tim Schroeders, who helps manage $1 billion at Pengana Capital Ltd. in Melbourne, adding that he expects Rio to get 50 percent. “This is a sensible move without betting the company or paying an extravagant price in the hope the major parties involved can find a common ground.”
Riversdale shares gained 3.2 percent to A$15.61 at the close in 4:10 p.m. Sydney time close on the Australian stock exchange. That’s 5.4 percent less than Rio’s latest offer.
“What that’s telling us up to now is there is no competing offer and we have had no indication of any alternative offer,” Riversdale Chief Executive Officer Steve Mallyon told Rishaad Salamat on Bloomberg Television’s “On the Move Asia” program today. “I believe Rio Tinto will be successful.”
Rio fell 3.8 percent to 3,931.5 pence in London, the lowest since Oct. 12. The company’s Sydney-traded shares earlier fell 2.4 percent to A$80.42.
At the increased offer, London-based Rio is paying 6.9 times the asset value of Riversdale, according to data compiled by Bloomberg. That compares with the 1.6 times median of 10 comparable industry deals globally in the past five years.
Global mining deals have had the best start to a year since 2008, with 261 deals worth $31.8 billion, according to data compiled by Bloomberg. There were 1,590 deals worth $144.8 billion last year, the highest level since 2007.
If successful, the deal would be Rio’s first acquisition since it bought Canada’s Alcan Inc. That deal left the company grappling with almost $40 billion of debt, forcing it to undertake a $15.2 billion rights offer. Last month, Rio said second-half profit tripled as the global economic recovery boosted prices for iron ore and copper.
Rio extended its offer, recommended by the Riversdale board, by two weeks to April 1. The company holds 17.5 percent of Riversdale, according to data compiled by Bloomberg. Tata Steel holds 27.1 percent and CSN, as the Brazilian steelmaker is known, has a 19.9 percent stake.
“We remain extremely skeptical about” Rio being successful in winning 50 percent of Riversdale, Gregory Lafitte, head of Asian merger arbitrage at Louis Capital Markets Ltd. in Hong Kong, said in an e-mail.
“Rio tried to gain more time to negotiate with the two parties, but we estimate that this improvement is not enough to encourage” them to change their minds, he said.
Tata Steel’s Managing Director H.M. Nerurkar said on Feb. 21 his company wanted to retain its stake in Riversdale. He didn’t answer two calls made today to his mobile phone. Tata also owns 35 percent of Riversdale’s Benga coal project in Mozambique. Flavia Ferreira, a spokeswoman at CSN didn’t immediately respond to e-mails today seeking comment.
“We’ve had constant communication with our shareholders such as Tata,” Riversdale’s Mallyon said today. “As an expanding steel company they are extremely interested in the potential to grow the Riversdale business in Mozambique and they have been quite supportive. I believe the Rio Tinto proposal will be something of enormous interest to Tata going forward.”
The price of coking coal has doubled in the past two years to about $301 a metric ton, according to UBS AG data.
A successful takeover would add 13 billion tons of coking coal to Rio’s resources, split between Riversdale’s Zambeze project and the Benga development, according to the Australian miner’s website. Riversdale said on Jan. 24 it would need an extra A$400 million to fund its share of the development cost for the Benga project’s stages 2 and 3 and “not less” than $2.9 billion for the Zambeze project.
“There is no question that Rio Tinto’s expertise is crucial to overcoming the development challenges of Riversdale’s projects,” Rio’s Ritchie said.
Construction for the first stage of the Benga project is targeted for completion during the second half of this year, for production capacity of 5.3 million metric tons of coal that may rise to 20 million tons. The Zambeze project is set to complete a pre-feasibility study in the same period, and production won’t start before 2014, Riversdale said.
Rio is being advised by Macquarie Group Ltd. and Riversdale by UBS AG. Rio is the world’s second-largest mining company by sales, behind BHP Billiton Ltd.
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