Shares rally as Rio Tinto abandons deal

Jun 6 2009 by Peter McCusker, The Journal

MINING giant Rio Tinto saw its shares soar today after announcing it had scrapped its multi-billion pound deal with Chinese state-backed aluminium company Chinalco.

Rio gained more than 14% as said it would instead form a tie-up with its former suitor BHP Billiton and launch a US$15.2bn (£9.4bn) rights issue to reduce its debt burden and boost the balance sheet.

The controversial US$19.5bn (£12.1bn) deal with Chinalco would have been one of China’s biggest overseas investments.

It was dropped because of improved market conditions, Rio said. The firm will pay Chinalco a US$195m (£120m) break fee.

Rio said the new partnership with BHP included all the firms’ Western Australian iron ore assets and would be equally owned by both companies.

The deal is thought to be worth US$10bn dollars (£6.2bn) in savings.

Rio chairman Jan du Plessis said: “The joint venture will establish an unrivalled iron ore business with world class assets and infrastructure.

“We believe it represents great value for shareholders and will create a business combination able to serve growing international markets with unparalleled efficiency.”

Analysts welcomed the move. Jonathan Jackson, head of equities at Killik said: “For Rio Tinto overall this is positive news and should remove any lingering concerns over the group’s financial viability and leaves it well placed to benefit from a continued upswing in the commodity cycle.”

He said it would also improve the group’s relationship with its institutional shareholders, some of whom had complained about the size of the Chinalco deal.

There had been investor grumblings over the move, which was felt to have rode roughshod over investor rights and would have left Chinalco with a sizeable stake.

Mr Jackson said: “The structure of the capital raising – both the rights issue and the payment from BHP Billiton – is much cleaner than the Chinalco alliance and should be well received by both shareholders and the regulators.”

But he warned the collapse of the alliance with Chinalco would not help Rio’s relationship with its largest customer – China.

Miners across the board suffered as metal and oil prices fell as the global economic slowdown took hold last year.

In November, BHP Billiton abandoned an offer for Rio because of the deteriorating conditions and soon after Rio announced it planned to axe 14,000 jobs as part of its response to weakening global demand.

Rio said today the outlook for 2009 remained uncertain although it expects to benefit from cost cutting moves and currency movements.