For months, the drama between Rio Tinto (RTP:NYSE) and BHP Billiton (BHP:NYSE), two rival mining giants, has been raging. Now, back from the dead, a deal between the two could save Rio Tinto’s life…
Call it cheesy, if you will, but I can’t help it. I’ve been sucked into this drama. I’ve written about these players before, these divas and giants of the industry…
This soap opera of near-deals and chest-banging, and the shame-filled affair with the Red Mistress… The storyline is long – dating back to November 2007.
On November 8, 2007, BHP Billiton made a takeover offer for beleaguered rival Rio Tinto worth $140 billion: BHP offered three shares of its stock for every one share of RTP. It was a 14.4% premium to RTP’s current share price, and it sent RTP’s stock soaring 30%.
Because of investor response, RTP flat-out refused. The former headliner has been playing second fiddle to BHP for a while now, and the offer was a slap in the face to the miner, who still has some major clout… and first-class assets.
But as time wore on, and the global recession was beginning to set in, RTP found itself deep in debt and the shadow of collectors loomed darkly over its shoulder.
You see, RTP financed a massive chunk of its takeover of Canadian aluminum company Alcan. And the bills were starting to flood in. At the same time, metals prices plummeted as demand dried up.
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RTP was floundering, but its pride kept it from taking BHP’s offer. And in walked the attractive Red Mistress: China.
China’s state-owned Chinalco, the country’s largest diversified mining company, offered a solution: a $19.5 billion deal that would pay for RTP’s upcoming debt payment and boost Chinalco’s 9% stake to 18%. Chinalco would also have a 50% stake in the RTP’s mining assets and $7.2 billion in convertible bonds.
I have to say, I expected this turn of events. China’s a huge customer, and a deal with Chinalco would certainly secure long-term contracts, and easy access to China’s deep pockets.
The Red Mistress is certainly alluring… which is why the news on Monday shocked me.
“Rio Tinto Scraps China Firm Deal,” reads the BBC News headline. The $19.5 billion deal, which seemed a lock but for regulatory approval, is off… No more hurried and hushed meetings in cheap hotel rooms, no more secret phone calls in the middle of the night, no more steamy rendezvous…
The affair with the Red Mistress was over. And in a surprising twist in the plot, RTP ran to the arms of its old rival, BHP. Stunned viewers may ask why.
Two things… Let’s first address why RTP called off the Chinalco deal.
RTP and Chinalco agreed to the deal back in late February, when aluminum prices and other base metal prices were at their lowest in nearly three years. Since then, prices have climbed 20% and more, and financial markets have also improved significantly, making it easier for RTP to raise money. Now the terms of the Chinalco deal are really undervalued.
RTP can’t just cut and run, though. It must pay Chinalco $195 million in compensation. The Chinese company is still red-faced over the surprise move, though.
The BBC reports Chinalco president Xiong Weiping as saying, “We are very disappointed with this outcome. We had maintained an extremely flexible and constructive attitude in our consultations with Rio Tinto.”
But why BHP, its old rival who had long planned RTP’s demise? How did a deal with BHP rise from the dead, like an old sinister character in this soap opera that just returned claiming to be RTP’s long-lost brother with a life-saving bone-marrow transplant?
Partly because the two are somewhat like long-lost brothers. The rivals have been competing in the same markets, for the same mines for decades.
Now the two are setting up a 50/50 joint venture. BHP will pay $6 billion to up its stake in equity interest to 50%. The two are also going to combine Western Australian mining operations, port facilities and rail lines, which is expected to save $10 billion.
RTP is also planning on raising $15.2 billion through a rights issue, following the success of the banking sector.
It’s a deal that “locks” China out of Australia’s natural resource wealth – at least as far as aluminum and iron ore are concern – and keeps Australian companies in charge of Australian assets.
Or does it?
The Red Mistress isn’t completely written out of the plot. She still owns 9% of RTP, and has voting rights. I wouldn’t be surprised at all to see another reappearance of this character in later episodes of “Days of Our Mines.”
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