Rio Tinto’s love affair with the Chinese aluminium giant, Chinalco, is ending.
Reports overnight Thursday from London said Chinalco would be quitting the $US19.5 billion deal Friday morning and Rio would be looking to ask shareholders for $US12 billion in a huge cash issue in London and Australia.
A story in the Financial Times broke the news of the deal falling over.
This morning Rio asked the ASX for its shares to be suspended until Tuesday, and BHP then revealed the terms of its part of the deal (and literally the structure of the joint venture). That saw BHP shares jump more than 6.6%, or over $2.30 to $37.45.
The BHP (http://imagesignal.comsec.com.au/asxdata/20090605/pdf/00958696.pdf) revealed the terms of the joint venture, stressing its stand alone and independent nature (no doubt to try and keep the European Commission at bay).
"Rio Tinto and BHP Billiton today signed a non-binding agreement to establish a production joint venture covering the entirety of both companies’ Western Australian iron ore assets. The joint venture will encompass all current and future Western Australian iron ore assets and liabilities and will be owned 50:50 by BHP Billiton and Rio Tinto.
"The joint venture is expected to unlock significant value from the companies’ overlapping, world-class resources.
"Both companies believe the net present value of these unique production and development synergies will be in excess of US$10 billion (100 per cent basis). These substantial synergies are anticipated to come from:
• Combining adjacent mines into single operations;
• Reducing costs through shorter rail hauls and more efficient allocations of port capacity;
• Blending opportunities which will maximise product recovery and provide further operating efficiencies;
• Optimising future growth opportunities through the development of consolidated, larger and more capital efficient expansion projects; and
• Combining the management, procurement and general overhead activities into a single entity.
The joint venture will operate as a cost centre and deliver iron ore, in equal volumes, to ships designated by BHP Billiton and Rio Tinto to sell independently through their own marketing groups.
"In order to equalise the contribution value of the two companies, BHP Billiton will pay Rio Tinto US$5.8 billion for equity type interests at financial close to take its interest in the joint venture from 45 per cent to 50 per cent.
Senior management of the entity will be determined jointly on the basis of the ’best person for the job‘ with broadly equal participation from Rio Tinto and BHP Billiton.
The initial Chairman of the nonexecutive owners’ council will be Sam Walsh, currently Rio Tinto Chief Executive Iron Ore, and the initial CEO of the production joint venture will be BHP Billiton Iron Ore President, Ian Ashby. Future CEOs will be appointed by mutual consent.
It seems Rio is trying to construct a scheme which would get around the almost certain rejection by the European Commission of any linking with BHP.
Rio Tinto issued a statement late last night that read:
"Rio Tinto notes press speculation. 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.
"A further announcement will be made in due course."
The main issue has been the sharp rise in the Rio Tinto share price that took it over $A71 in Australia this week (it fell sharply yesterday, down 6.5% or more than $4.70 to $A66.90. BHP shares fell $A1.92 to $A35.11).
That rise has eaten into the strike price of the convertible bond. It’s suggested the bond is in two tranches, one converting at $A45 a share, now surpassed and the other at $A92 a share.
"Rio is now exploring a number of alternatives, including a $12bn rights issue and creating a joint venture with rival BHP Billiton which would include stakes in eight assets that Rio had originally proposed to sell to Chinalco."
Those stakes include the Hamersley iron ore business in WA, the Weipa bauxite mines, the Yarwun alumina refinery in Queensland and the Escondida copper mine in Chile where BHP already has the majority 57% stake.
The FT said Chinalco’s departure follows rising anger from Rio shareholders over the original terms of the deal, which would have seen their stakes significantly diluted after the Chinese group converted its bond to an equity stake of 18%, from the current 9.7%.
Legal and General in London and Australian Foundation Investment Co in Melbourne are two shareholders that have gone public in opposing the deal. Legal and General is a shareholder in the Plc company, AFIC is a shareholder in the Australian listed company.
Rio still needs to pay back almost $US 20 billion in debt over the next two years, hence the issue.
There have been reports for several months now that Rio was working on a "plan B’ to raise funds instead of doing the Chinalco deal.
If confirmed in the morning, it looks like the Federal Government will be spared to requirement to approve the controversial deal with the huge Chinese company.
But the link up with BHP looks like its back on the map, which will pose problems in Europe, no matter what the companies say or do from now on.
The deadline for the Federal Government decision on the controversial $US19.5 billion Chinalco deal was Sunday week, June 14.
Chinalco has postponed a decision on financing 50% of the Yarwun project until June 15 (making it conditional on the FIRB decision, but now we know that the delay reflected the arguing with Rio.
The development will
