By Gabriel Caplett
Rio Tinto’s proposed fire sale to Chinese government-owned and controlled Chinalco, appears to be facing its most intense criticism yet. The London Telegraph is reporting that Australia’s Foreign Investment Review Board may attempt to block the sale and a number of major shareholders are expressing their frustrations more strongly than ever, despite recent attempts by Rio’s new chairman, Jan du Plessis, to sway opposition to the proposed deal.
Reuters is quoting one anonymous “top 25” investor saying, “This was a bad deal a few months ago and it’s a bad deal now.”
On May 5, the Australian reported that the Rio board considered limiting Chinalco’s purchase to 15%, in order to appease existing shareholders. A new alternative shows Rio scrapping the Chinalco deal altogether and offering existing shareholders an option to purchase roughly £5 billion in new shares. However, in a letter to the Australian Securities Exchange, the company wrote that it “remains committed to delivering this strategic partnership.” Speculation has begun to affect Rio’s share price, which is beginning another freefall.
Chinalco, already Rio’s largest shareholder, is attempting to purchase just under 20% of the company in what would be, by a large margin, China’s largest overseas investment. The deal would give China key stakes in many of Rio’s most prized mining operations, including Kennecott Utah Copper (25%), the company’s controversial Grasberg Mine assets (30%) and valuable Australian iron ore operations. Chinalco would also maintain two non-executive seats on Rio’s board of directors.
Xiao Yaqing, former CEO of Chinalco, has been rewarded for the proposed deal with an appointment as deputy secretary-general of China’s cabinet, the State Council. Caijing, China’s leading business magazine, called Xiao “a national hero for promoting overseas acquisitions.”
The deal has been seen as a last-ditch effort for Rio Tinto to pay off half of its nearly $40 billion debt by the end of 2010. The company acquired the debt by purchasing aluminum giant, Alcan, in 2007. Although the deal passed without much criticism from investors, the company is currently under intense scrutiny for making the purchase.
“Rio Tinto’s board must be beside themselves having to do this,” said Mark Pervan, a senior commodities analyst at ANZ Bank, in February. “It’s very unfortunate timing, buying at the top and selling at the bottom.”
For Chinalco, the timing couldn’t be better. The deal has been coordinated and financed by the Chinese government, currently the world’s primary driver for metals demand – a demand well-recognized by Rio Tinto.
Outgoing Rio Tinto Chairman Paul Skinner’s noted, in the company’s 2008 Annual Report, that “it is the rate of deceleration and acceleration of the Chinese economy which drives metal demand and prices, given its major share of total global demand.”
In the same report, company CEO Tom Albanese said that he expects “global demand for Rio Tinto’s key products. . . to double in the next 15 to 20 years. That growth will be sustained in large part by China.”
China’s bold move has led the high profile international mining analyst, Michael Komesaroff, to predict that the mining industry is facing a potential major consolidation that could result in the dominance of only four major players: Brazil’s Vale, Russia’s Norilsk/Rusal, China’s Rio Tinto and BHP Billiton. Only BHP would be free of full state ownership or control.
In sharp contrast to the reportedly well-managed BHP, Rio seems to be suffering from a series of poor management decisions. Where BHP was forced to cut 3,400 jobs, Rio is cutting a reported 14,000. Where BHP is surprising analysts with steady profits, Rio has faced an incredible crash in the value of its stock.
This gap has also been evidenced by Rio’s persistence in attempting to open highly controversial nickel projects in Michigan and Sulawesi. The company’s Eagle metallic sulfide project faces charges of “incompetence” in its design of the mine from well-respected mining experts and, while receiving endorsement from state regulators and officials, Eagle has been vigorously opposed by local citizens and the Keweenaw Bay Indian Community. Years after submitting applications to the State of Michigan, the company still hasn’t obtained a single complete mining permit from the state and has yet to hear word on permits required from the US Environmental Protection Agency.
In sharp contrast to Rio’s priorities, BHP recently conceded that opening its massive Ravensthorpe nickel mine, in Australia, was a mistake and has abruptly cancelled plans to open a controversial nickel mine on Gag Island, in West Papua. CEO Marius Kloppers says the decision to open Ravensthorpe “wasn’t one of our best.”
Last year BHP attempted to purchase Rio in a bid that was rebuffed by the company’s board. In an attempt to thwart the bid, Chinalco and Canadian Alcoa secured a 9% stake in Rio Tinto for $14 billion. Alcoa is now selling its share of the investment to its partner for roughly $1 billion.
LSMN
Eve Divine
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