Chinalco is reported to be still pressing ahead with its attempts to cement closer links with Rio Tinto, despite a London report in the Financial Times suggesting that it might be offered less convertible debt by Rio.
The Financial Times said Rio may seek to reduce the convertible debt it’s selling to Chinalco and offer about $US3 billion to other holders to broaden participation.
That would also have the clever impact of forcing other big shareholders to put up, or shut up.
But pressure is also rising to structure the deal because Rio shares have risen so strongly, pricing one part of the Chinalco capital deal out of the market.
Chinalco wants to invest a total of $US19.5 billion in Rio, and Bloomberg reported late yesterday that the company’s Vice President, Li Youqing said “We haven’t received any official request to change the original plan so far, so we’re proceeding with it. It is natural for shareholders to have this or that concern”.
Chinalco, already Rio’s biggest shareholder, has agreed to buy $US7.2 billion of convertible debt and stakes in Rio’s projects worth $US12.3 billion.
If the investment is approved by the Australia Government and Rio shareholders Chinalco will own 18% of the dual-listed company should it convert the debt.
In the Financial Times story, the paper quoted another Chinalco executive, Wang Wenfu, president of Chinalco Overseas Holdings, who dismissed demands by some Rio shareholders to be given the same opportunity as Chinalco to buy convertible bonds. “This investment is a package. It is a result of two months of very intensive negotiations. It cannot be viewed separately,” he said.
The paper said "The merits of the proposed Rio/Chinalco deal may also have been undermined by a resurgence in the shares of the Anglo-Australian mining group and higher commodity prices since the deal was struck in February.
"Mr Wang said markets were volatile in the short term but the Chinese mining group offered Rio certainty and a package of solutions that would address its debt issues, future financing needs and requirement for access to the Chinese resources sector.
“I am not sure the current market is sustainable. We have seen some recoveries that don’t continue,” he said.
"Against that background, Rio has stepped up consultation with Chinalco and its other shareholders in recent weeks to explore forms of compromise."
The rise in Rio’s share price, which closed in Australia yesterday at $A67.30 (around $US49.20), is already higher than the $US45 strike price for one of the two tranches of convertible bonds. The second tranche is priced at $US60 (just over $A92 a share).
Rio’s shares are up around 49% the deal with Chinalco was announced on February 12.
The surge in the share price could very well be the factor that forces a change in the Chinalco deal, notwithstanding the Australian government decision.
At $A67 or more, Rio shares are much stronger than they were when it negotiated from a position of weakness in February.
That $US45 a share strike price hurdle should be tossed out and one set at $US60 and another at $US90 or $US100 to give Chinalco a longer term hurdle, rather than an easy profit-driven hurdle to meet.
