MAC: Mines and Communities

China buys into Rio Tinto

Published by MAC on 2007-11-11

China buys into Rio Tinto

11th November 2007

Last week, as BHPBilliton made an unprecedented bid for Rio Tinto, the UK company's CEO, Tom Albanese, was in China. He said he hadn't gone there looking for a "white knight" to block the Australian-British giant's takeover attempt, since the trip had been arranged beforehand.

That's as may be. However, news that China's state-owned China Development Bank has now staked itself a share in Rio Tinto suggests the company is urgently mobilising to fend off BHPBilliton and keep to "its own destiny".

Chinese bank buys shares in Rio

David McKay

11th November 2007

[] -- THE China Development Bank, which is an arm of the Chinese government, has taken a slim but significant stake in Rio Tinto, the UK listed mining firm which rebuffed a merger offer from BHP Billiton last week. Sunday Telegraph, a London newspaper, reported the CDB had bought less than 1% in Rio Tinto, a tiny stake but significant owing to BHP Billiton's earlier three for one shares offer. The Sunday Telegraph did not name its source.

And in a report by The Times, BHP Billiton is said to be preparing the sale of its petroleum arm to either Chinese or other buyers for at least $40bn, funds that would be used to finance the takeover of Rio Tinto. "It is the first time a Chinese state-backed group has taken a direct stake in a global miner and will fuel speculation that China may intervene in the bid battle," the Sunday Telegraph said.

Tom Albanese, Rio Tinto's CEO, was on a trip to China, arranged before BHP Billiton's bid was made public. Rio Tinto's share price rocketed up by a third on November 8 after BHP Billiton confirmed market speculation it had approached Rio to combine their assets worth an estimated $350bn.

A combined company would have iron output similar to that of world number one CVRD and would be in a similar position with copper, rivalling Chile's Codelco for the number one spot. This would be negative for China, which consumes about half of the world's iron ore, because it would given the combined company huge pricing power.

Already, iron ore prices have increased by double digits every year for the last four years and are tipped to increase by 20% plus in current contract negotiations effective from April.

Quoting an Investec report from earlier this year, Miningmx said one possible takeover scenario for Rio Tinto would see the Japanese and Chinese participate in the business. The diversified mining business would retain overall management control, Investec said.

China's efforts to secure its own sources of raw materials are well known with some $5bn in trade surplus earmarked for African investment. Standard Bank and Industrial & Commercial Bank of China Limited (ICBC), China's biggest bank by market capitalisation, were planning to set up a global resource fund to target investment in mining, metals, oil and gas, projects, and associated industries anywhere in the world.

"China is running on a huge current account because they are exporting more than they are importing and this has resulted in the country accumulating huge amounts of dollars," said Dawie Roodt an economist for the Efficient Group in September.

"China has so far used these dollars buying equities in the US but they have now formulated an investment arm known as the Chinese Investment Company, which is currently looking at investing somewhere else in the world and possibly in South Africa and the rest of the African continent," he said.

The Times said BHP's financial advisers, Goldman Sachs and Citigroup, had already flown out to China to sound out potential bidders for the petroleum subsidiary.

"The company is arranging a $70bn bank facility through Citi to refinance some of Rio's debts should a takeover be successful. Some $30bn of this sum could be used as a cash sweetener to encourage Rio shareholders to sell out," The Times said.

However, Albanese is thought to be preparing a roadshow with investors in the City to show them Rio has untapped potential as a standalone. Rio's board is also understood to have begun discussions with potential suitors such as CVRD and Anglo American, transactions that may keep Rio in charge of its own destiny.


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