Rio Tinto may have the rating on $US5 billion of its debt cut by Moody’s Investors Service after BHP pulled its $102 billion bid and exposed Rio to the realities of slumping prices and demand for metals, coal and ores.
Without the underpinning of BHP’s 3.4 share offer, Rio is on its own, and so is the BHP board and management ahead of today’s AGM.
That was very evident in the market yesterday.
Rio shares fell 34%, or $21.89, to close at $42.01 in Sydney yesterday, BHP shares closed up $1.03, or 3.9% at $27.25.
That’s an overall swing of 38% in relative value from Rio to BHP.
Never before has an Australian listed company declined by more than $30 billion in one day, but Rio Tinto now finds itself capitalised at $61 billion, versus $153 billion for BHP.
That’s more than 2.5 times Rio’s market cap.
The fact that BHP’s shares rose in London Tuesday night and in Australia yesterday is a vote against the BHP board in taking so long to abandon something that had been a looming disaster for some months.
Rio’s tumble here yesterday was in line with the 37% fall in London Tuesday night after BHP finally pulled the plug on the bid.
Now Rio is helpless in the onslaught of shorts and other speculators keen to exploit the company’s $US42 billion of debt used to buy Alcan last year.
Moody’s said the BHP decision was also a factor in the ratings review for Rio.
But Rio’s departing Chairman, Paul Skinner said he’s “comfortable” with the financial position of the company, which remains committed to asset sales following the Alcan transaction.
Rio’s response to the bid was “always driven by value” Skinner said in media interviews in Australia yesterday.
He would say that, but he won’t be around the pick up the pieces as he’s off to be chairman of BP. That departure might come sooner than in 2009 after this debacle.
Skinner was quoted as saying that it wasn’t surprising BHP dropped the bid.
He said he was committed to staying as Rio chairman.
But London reports have him heading for the chairman’s role at BP, unless there’s a hitch he hasn’t told us about.
While Skinner was upbeat. Moody’s was more realistic.
“The review reflects Moody’s expectation that Rio Tinto’s mid-term performance is likely to be adversely impacted by negative market conditions for key metals such as copper and aluminum,” Moody’s said in its statement yesterday.
“Given the slowdown in global steel production, greater uncertainty exists with respect to mid-term volumes and prices in iron ore, an important business segment.”
Rio said last month it would review project spending and may delay $US10 billion of asset sales that aimed to reduce debt from its purchase of Alcan.
That ‘may’ should be updated to a ‘will’. At least BHP was realistic in pointing out how tough it would be to sell assets to meet the objections of the EC anti trust regulators.
Moody’s also said that Rio’s “high level of debt following the 2007 debt-financed acquisition of Alcan is also a factor in the review.
“A key factor in the review will be the company’s ability to execute on its divestiture program and reduce debt over the next 12 months, including the $8.9 billion maturity in October 2009.”
What price Rio shares to fall lower than yesterday’s 52 week close?
The $40.80 close was a 52 week low and given the shortage of prime targets for the shorting fraternity in the market, and Moody’s statement (to be matched no doubt soon by Standard & Poor’s and Fitch), there’s every chance new lows will be obtained.
Rio had its rating outlook cut by Moody’s earlier this month.
Standard & Poor’s Ratings Services cut its rating outlook on Rio to “developing” from “positive” on October. 28, citing the mining company’s debt, limited asset sales and weaker commodity prices.
Rio could try a rights issue: a placement is probably out to a strategic investors because of the presence of Chinalco and Alcoa as a 12% shareholder bought on market at very high prices. Chinalco says it will lift that stake to the 14.9% allowed by the Australian Government.
Chinalco is already a strategic investor having paid others for the stake and not Rio, which limits options, as does the credit crunch and downturn in commodities.
How low can it go?
But remember, if it had said ‘yes’ to BHP’s bid, both companies would be top of the list of companies most expected to list, and then flop.
The shorts would have had a field day.
Just as Qantas would have been if the private equity bid had succeeded in May 2007.
A final point: it’s surprising how much of the media reporting has gotten stuck into Rio, and not concentrated on BHP, which was the aggressor from the start.
BHP has wasted more than $700 million on fees and charges to advisers and banks, forcing Rio to spend around $300 million of its own. A billion dollars up against the wall, just like that.
Incredible. Today’s BHP AGM will be interesting.
