Rio Tinto Drops Chinalco for Rights Issue

Rio Tinto's (RTP) $19.5bn financing deal with Chinalco (ACH) has collapsed and the mining giant is set to instead announce a $15.2bn rights issue.

Rio's board was meeting last night after an emergency statement to the stock market. "Rio Tinto is pursuing a range of options, some of which are at an advanced stage, for maximising shareholder value and improving the group's capital structure," it said.

The Anglo-Australian firm refused to make any further comment, but while the Chinalco deal may still be agreed under revised terms, the miner is now looking at alternative ways to raise funds to pay down the $20bn of debt falling due over the next two years.

One option is a rights issue worth between $10bn and $15bn, which looks a much more viable proposition today than in February, when the deal with Chinalco, owned by the Chinese state, was struck. Rio was then reluctant to ask shareholders for funds having seen the big discounts that rival miner Xstrata was forced to offer in order to get a smaller cash call away in January.

Since then, however, Rio's share price has risen by 50 per cent and capital markets have eased. Market experts believe the miner could raise $12bn or more from shareholders with an issue priced at a 40 per cent discount.

In addition to a fundraising, Rio is believed to be exploring a deal with BHP Billiton (BHP), the mining group that last year pulled out of a bid to acquire it, about a joint venture in Western Australia, including many of the assets included in the Chinalco deal.

Joe Lunn, a mining analyst at the stockbroker FinnCap, said that while the market's initial reaction to the collapse of the Chinalco deal was shock, with Rio shares off 6.6 per cent yesterday afternoon, a change of plan made sense. "It is no bad thing for Rio," he said. "Analysts have been working on alternative scenarios for some time."

Rio's announcement four months ago of Chinalco's investment – which comprised $12.3bn for direct stakes in the miner's assets and $7.3bn for convertible bonds – provoked a protest from shareholders concerned that their pre-emption rights were being ignored.

That opposition has grown in recent weeks because the convertibles, originally priced at a significant premium to Rio's share price, today look much better value for Chinalco now the miner's stock has risen so sharply.

The deal also faces political opposition in Australia, where the government is concerned about key strategic assets coming under Chinese control. Australia's Foreign Investment Review Board is due to rule on the deal on 15 June, and has been in talks with Chinalco this week, prompting speculation that the Chinese company has been warned it will face regulatory hurdles.

Rio has consistently insisted it is committed to the Chinalco alliance, but has held talks with the Chinese company in recent weeks over the exact terms of the deal, which shareholders were set to vote on at the end of next month.

It remains unclear which of the two companies would be considered the instigator of a break-up of the alliance. While Rio has been keen to improve the terms of Chinalco's investments, it would have to pay the Chinese company a break fee of $195m to get out of the deal, and would also be nervous about damaging relations with one of its biggest customers. Alternatively, it could be that Chinalco is walking away, baulking at revising its terms downwards or the demands set to be made upon it by Australian regulators.

Either way – and even if a U-turn is seen to be to the benefit of Rio – any collapse of the Chinalco deal will put pressure on the miner's management, which has doggedly defended the transaction against shareholder protests.

Tom Albanese, Rio's chief executive, was a fierce opponent of the BHP takeover, which could be difficult if a major joint venture now goes ahead. Rio's chairman, Jan du Plessis, was Rio's second choice to replace Paul Skinner, who stepped down earlier this year, having seen chairman-designate Jim Leng stand down after opposing the Chinalco deal.

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