News that cash-strapped Anglo-Australian mining giant Rio Tinto is in talks to sell some assets to the Chinese state-owned aluminium maker Chinalco, its biggest shareholder, has put a question-mark over the Australian government’s intentions.
The other big question, as Stephen Bartholomeusz at BusinessSpectator says, is whether Rio “can embrace the dragon without being consumed, or at least singed, in the process?” Cleary, he adds, the company is willing to at least seriously contemplate accepting that risk.
Chinalco owns 12 per cent of Rio’s London-listed shares and 9 per cent of the whole group, and said last year it was looking at increasing this stake. As the FT notes on Monday, Chinalco has permission from the Australian government to raise its stake in either Rio’s London-listed or Australian-listed shares, or the whole group, to no more than 14.9 per cent. Rio has proposed issuing convertible bonds to the Chinese, but this could prove politically controversial given the Australian stake cap.
The Times also noted on Monday that Rio faces a clash with Canberra over any stake sale to Chinalco, amid growing concern in Australia about strategic iron ore and coal assets falling into Chinese hands. It’s unclear, the paper noted, whether Canberra would include a joint venture with the Chinese as contributing to Chinalco’s overall control of the company.
The Australian newspaper, however, says under Australian foreign investment rules, Chinalco could apply for a waiver to raise its interest to as much as 19.99 per cent of the group. And, it notes, the Rudd government has not ruled out allowing a greater stake. Although the public mood in Australia last year was more on the protectionist side, following a string of Chinese investments in mainly resources-related companies, growing anxiety about falling global demand for commodities, job losses and slowing economic growth may make it much easier for Rudd to allow the Chinese to raise their stake.
Actually, says BusinessSpectator’s Bartholomeusz, gaining Canberra’s immediate approval is not a big deal, as an issue of convertible bonds would be a way for the Chinese to gain an economic exposure to Rio greater than allowed under the undertakings while providing time to approach the Australian government again about raising the ceiling on the holding.
The asset that would probably most appeal to China is Rio’s vast Pilbara network of iron ore mines, railways and ports in Western Australia. Rio’s operating Pilbara iron ore assets were valued at $9.9bn in Rio’s first-half profit report last year, but it is thought the miner would be looking for a lot more relative value in any deal with Chinalco. Other assets that could form part of a deal are Queensland and NSW coal operations, Queensland and Northern Territory aluminium operations and Northern Territory uranium assets.
Though Rio is clearly desperate for cash, analysts say it would not conduct a fire sale of its assets, according to Reuters. Rio has $8.9bn in debt due in October and another $10bn due in October 2010. The company’s agreement announced Friday to sell potash assets for about $850m and its Corumba iron ore mine in Brazil for $750m to Vale, which ranks ahead of Rio as the world’s biggest iron ore miner, was regarded as fair value by analysts.
The market, at least, likes the talk of asset sales. Rio shares were up 4.6 per cent in Sydney at A$44.10 on Monday afternoon, while the wider market was down around 1 per cent and bigger rival BHP Billiton fell 2.4 per cent.
Expect a big slide if the Chinalco talks fall apart. The Australian describes these as Rio’s “last chance to avoid a multi-billion-dollar rights issue as investors press chief executive Tom Albanese to move to lighten the company’s $38.9bn debt.”
Canberra could face a make-or-break decision soon, as Rio is undoubtedly anxious to finalise a deal – or a rights-issue plan – before it reports 2008 results on February 12.
Perhaps hearteningly, for Rio, Australia’s treasurer, Wayne Swan, declined to speculate “about those matters” such as foreign ownership of Rio when asked during a press conference. “But we welcome foreign investment. We have a set of guidelines and a national interest test with those guidelines,” he said.
Related Links:
Rio Tinto statement to ASX (02/02/09) – Rio Tinto
Rio Tinto in asset sale talks with Chinalco – FT