MAC: Mines and Communities

Rio Tinto battles for new copper, gold and coal

Published by MAC on 2010-12-13
Source: Reuters, Business Spectator

UK miner extends grasp over Mongolia, goes for Mozambique

Rio Tinto, the third most highly capitalised mining company, and second among global iron ore producers, is bidding for Australian-listed, Mozambique-based, coal mining company, Riversdale.

The fit is obvious: Riversdale controls two of the world's largest deposits of high quality coking coal, used to smelt steel. Its mines in Mozambique's Tete province could become the world's biggest single source of this particular "dark material".

Reports to date have mentioned a clutch of "usual suspects" that might compete with (or join) Rio Tinto's Riversdale bid: Vale, Xstrata, Anglo American and Peabody Energy, among them.

But, on paper at least, Tata Steel also appears a possible front-runner. The Indian company's domestic steel plants are closest to Mozambique in terms of sea-borne access, and its stake in Riversdale has mounted to 25%.

India's National Mining Development Corporation (NMDC) is also "eyeing" a 10% stake in the company. Rumour has it that India's Jindal Steel conglomerate is doing much the same.

With international demand for coking coal markedly rising, and a current squeeze on supplies, Rio Tinto's initial US$3.5 billion offer for Riversdale is likely to be increased. But the UK-Australian company could yet be out-matched by other bidders; or Rio may bed down with a partner.

If a deal eventuates, it would doubtless rank as one of the most significant of its kind deals since the 2008-2009 credit collapse - and certainly in Africa.

(Just for comparison: this year so far, Newcrest of Australia has paid US$9 billion to acquire Lihir Gold, and Canada's Kinross Gold shelled out more than US$7 billion for Red Back Mining. Goldcorp paid US$3.4 billion for Andean Resources; while Canada's Quadra Mining merged with FNX at a cost of Cdn$3.5 billion).

Monglian hoard

Even more important for Rio Tinto's longer-term strategy is its Mongolian play.

For the past few years, it sights have been fixed  on securing a greater chunk of the Oyu Tolgoi project, currently majority-owned by Robert Friedland's Ivanhoe Mines.

Like Riversdale's coal venture in Mozambique, Oyu Tolgoi ranks as "world-class".

But it's far more attractive to Rio as a future profit-spinner, potentially hosting the world's biggest trove of copper and gold. In this respect, Oyu Tolgoi could come to rival the Grasberg mine in West Papua, where Rio Tinto has a minority, but critical, joint venture stake with Freeport.

Over recent months, Ivanhoe  has sparred with Rio, threatening to invoke an earlier arrangement which purportedly prevented the UK giant from swallowing up its junior partner.

However, Mr Friedland is a realist; and the reality is that Ivanhoe could never afford to "progress" the Oyu Tolgoi venture on its own.

So far, Rio Tinto has invested some USD 1.73bn in Ivanhoe, inclusive of convertible debt, and increased its ownership to 34.9%.

Then, last week, Ivanhoe agreed for Rio Tinto to acquire 20m Ivanhoe shares, currently spread between Citibank and Robert Friedland. Its stake is now likely to rise to 47% by mid-2011; possibly increasing to 49% shortly afterwards.

As Mineweb correspondent  Barry Sergeant put it on December 8th, the arrangement will  "see[s] management of Oyu Tolgoi move, unequivocally, to Rio Tinto."

Of course this isn't necessarily a final victory (Rio Tinto must know, from previous experience, that "Toxic Bob" Friedland often has a card hidden up his sleeve).

It's also conceivable that the Mongolian government will seek to enlarge its current Oyu Tolgoi share. But the earlier jousting looks like being over - bar some further shouting.

Meanwhile , as mining correspondents speculate on the shape of a final arrangement, none of them seems bothered to ask one vital, as yet un-answered, question:

Has Rio Tinto fulfilled its undertaking, given three years ago, not to secure a significant stake in Ivanhoe or Oyu Tolgoi, until Friedland's company entirely quits Burma and ceases profiting from its erstwhile collaboration with the military regime?

There's no evidence that it has.

For earlier story, see: The road for Rio leads through some distinctly murky waters

[Commentary by Nostromo Research, 13 December 2010].

Rio's move on Riversdale could spark bidding war


6 December 2010

Africa-focused coal miner Riversdale Mining Ltd has confirmed it has held talks with global miner Rio Tinto Ltd regarding a $3.5 billion takeover offer, but says there is no certainty a transaction will proceed.

The approach sent the target firm's shares surging 16 per cent and setting up a potential takeover battle.

Rio's move on Riversdale is likely to spark a bidding war, as the company has hard coking-coal projects in Mozambique that could eventually supply 5-10 per cent of the global market for the key steel-making material.

Brazil's Vale is seen by some analysts as the most likely rival bidder, as it already has coal mines nearby in Mozambique. India's Tata Steel , Riversdale's top shareholder, was also seen as a potential bidder.

Xstrata Plc , Anglo American and Peabody Energy could also be interested. Top coking-coal exporter BHP Billiton is seen as a less likely contender, as it has its own growth options in Australia. Xstrata and Anglo declined to comment.

The company's fourth-biggest shareholder, Australian investment firm LinQ Management, expects Riversdale to be hotly contested, given the scarcity of good quality coking-coal assets and booming demand from China and India for the commodity.

"It's in a good part of the world for accessibility, and we think there's plenty of further upside for whoever's interested in buying it. Hopefully there will be other interested suitors coming to the table," LinQ managing director Clive Donner said.

Riversdale confirmed media reports that Rio was talking about an offer around $15 a share for Riversdale, which would value the group at $3.5 billion, only a 6 per cent premium on Riversdale's close on December 3 ahead of a leak to a UK newspaper. Riversdale also hinted that it was talking to others.

"While discussions with Rio Tinto are ongoing, there is no certainty that Rio Tinto or any other party will proceed with any proposal for the acquisition of Riversdale," Riversdale said.

Rio Tinto confirmed it was in talks, but also said that it had told Riversdale it was not currently in a position to submit a formal bid for the company.

"Hence nothing is on the table," a Rio spokesman told Reuters in an email. "Discussions are incomplete."

Riverdale's shares hit a high of $16.41 on Monday, its biggest one-day gain in more than two years. They ended up 15.7 per cent at $16.31.

UBS is advising Riversdale and Macquarie is advising Rio Tinto.

Seeking mid-sized takeovers

A deal would mark Rio Tinto's first significant acquisition since its badly timed $38 billion takeover of Alcan at the height of the commodities boom in 2007, which forced it to sell more than $13 billion worth of assets to help slash debt.

It salvaged its balance sheet last year with a $US15 billion rights offer after scrapping a planned $US19.5 billion investment by its biggest shareholder, China's Chinalco. That deal was replaced by a planned iron ore joint venture with BHP, which fell apart in October after regulators objected.

Rio said last week it was hunting for small to medium-sized acquisitions worth around low-single-digit billions of dollars, in stark contrast to bigger rival BHP which remains on the prowl for major deals, like its recently failed $39 billion bid for Potash Corp.

Rio would need to pay well over $3.5 billion to win support from Riversdale's three major owners: Tata Steel, Brazilian steelmaker CSN and US hedge fund Passport Capital, who together own more than half the company, analysts said.

"Not only will they have to pay a big premium for it, but there are likely to be other bidders," said CLSA analyst Hayden Bairstow, who has a price target of A$17.50 a share on Riversdale.

Rio's decision to shrug off the complex ownership in Riversdale and make a tilt for the mid-sized miner not only underscores its hunger for scarce quality coking coal assets, but also marks a tacit recognition that Mozambique may be the new frontier for coking coal.

Analyst Charles Kernot at Evolution Securities in London said the tentative price for Riversdale worked out to about 30 cents a tonne of coal resources, while Rio just agreed to sell South African coal assets for 7.5 cents a tonne.

"Rio Tinto's reported interest (in Riversdale)... appears to us to make little commercial logic -- particularly as Riversdale also has infrastructural challenges in Mozambique," Mr Kernot said in a note.

Riversdale's Zambeze project holds 9 billion tonnes of certified resources, one of the largest undeveloped coking coal resources in the world. It also owns 65 per cent of the neighbouring Benga project.

The company is in the midst of completing an agreement to give China's Wuhan Iron & Steel Corp an 8 per cent stake in the company and a 40 per cent stake in the Zambeze project, another potential hurdle for Rio Tinto. Wuhan was not immediately available for comment.

Rio shares in London fell 0.7 per cent to 4384 pence by 0925 GMT, compared with a 0.3 per cent decline in the British mining index. Its 5-year credit default swaps were trading steady at 89/94 basis points, as a takeover of Riversdale was seen as easily affordable.

While Vale would be looking closely at any bid for Riversdale, one analyst, who declined to be named, said if Vale had been interested, it would have pounced earlier.

The analyst said that Mozambique may have discouraged Vale from bidding as the country wants more than one company developing its coal resources.

Riversdale also owns an operating underground coal mine in South Africa, Zululand Anthracite Colliery, which could attract strong interest for its good quality thermal coal, especially given its proximity to India, which faces a big coal shortage.

Rio's tasty Mongolian stake

By Stephen Bartholomeusz

Business Spectator

9 December 2010

After months of tense sparring, it would appear Rio Tinto and Ivanhoe Mines have finally negotiated a truce that will enable Rio to take effective control of the giant Oyu Tolgoi copper-gold project in Mongolia.

The deal signed between the two companies last night will come at significant cost to Rio Tinto, but appears to put an end to Ivanhoe's attempts to wriggle out of past agreements with Rio Tinto and put some distance between its major shareholder and Ivanhoe's 66 per cent interest in the project.

Ivanhoe had introduced a 'shareholders' rights' plan and announced a $US1.2 billion capital raising and terminated a clause in its agreement with Rio Tinto that prevented it from issuing equity to third parties without offering it to Rio Tinto first in what appeared to be a desperate attempt by its founder Robert Friedland to prevent Rio Tinto from taking control of Ivanhoe and Oyu Tolgoi.

Last night's agreement, which includes the sale of about $500 million of Friedland's own shareholding to Rio Tinto, would appear to end those manoeuvrings and will result in Rio Tinto taking direct management control of the project.

It would appear that Friedland folded and agreed to allow Rio Tinto to strengthen its grip on Ivanhoe and the mine because he was unable to find a third party willing to take on Rio Tinto and provide the funding that would have enabled Ivanhoe to develop Oyo Tolgoi and retain its independence. If Oyu Tolgoi were to be developed - and the Mongolian government reassured that it would remain on schedule - Rio Tinto was the only obvious source of the funds.

Rio Tinto, which owns about 35 per cent of Ivanhoe today and has warrants that could take it to 44 per cent, has already invested close to $3 billion in Ivanhoe to effectively fund the development of Oyu Tolgoi to this point.

Under the latest deal it will provide $1.8 billion of interim debt funding until a project finance package can be arranged, it will exercise its remaining warrants, it will take up its entitlement to a $1.2 billion Ivanhoe rights issue, will acquire 20 million shares from Friedland and will be given the right to subscribe for Ivanhoe treasury shares. The various elements of the deal would enable Rio Tinto to lift its shareholding to 49 per cent if it chose, at a cost of an additional $US3.7 billion or so.

Oyu Tolgoi is a critical project for Rio Tinto.

It is one of the largest and highest-quality undeveloped copper deposits in the world during a period where there are concerns about a looming major shortfall of supply.

It also represents a diversifier for Rio Tinto, which today generates about 70 per cent of its profits from iron ore and which is continuing to invest heavily in expanding its iron ore production.

In the near to medium term that ought to be an extremely profitable investment strategy, but there are concerns that in the longer term Rio Tinto could become over-exposed to iron ore, particularly as there are some analysts who believe that the massive expansions in iron ore production will bring that market into surplus in the latter part of this decade.

Home | About Us | Companies | Countries | Minerals | Contact Us
© Mines and Communities 2013. Web site by Zippy Info