MINING FINANCE / INVESTMENT

Rio Tinto in big asset sales talks with Chinalco

Rio Tinto is in talks with China's Chinalco over sales of direct interests in some of its key operations as well as stake in the company itself.

Author: Lawrence Williams
Posted: Monday , 02 Feb 2009

LONDON - 

Reports in Sunday's UK broadsheet newspapers, The Sunday Times and The Sunday Telegraph, both pointed to debt-ridden mega miner Rio Tinto being involved in major asset sales talks with China's state-owned Chinalco, which already holds an 11 percent stake in the company.  While the two newspaper reports differed in the detail, it would seem they are, indeed accurate in that such talks have been under way.  Indeed Rio has issued a response to the reports confirming that they are in progress, but giving no specific details. 

The Rio response was as follows:  "As previously announced, the Boards of Rio Tinto are continuing to consider a range of options. In this regard, Rio Tinto confirms that it has held discussions with Chinalco regarding Chinalco acquiring minority interests in various operating businesses of the Rio Tinto group and also investing in convertible instruments." 

"There can be no certainty that a transaction will ultimately take place and any possible transaction would be conditional upon approval by the shareholders of Rio Tinto and all necessary government and regulatory authorities."

Rio Tinto is committed to reducing its debt burden, which is around $40 billion, by at least $10 billion in the current financial year - it has already announced agreement on $1.6 billion of asset sales to Vale - see Rio Tinto sells more assets - potash and iron ore to Vale for $1.6 billion. 

 The situation appears to be that Rio has been talking to Chinalco about the latter purchasing minority stakes in some of Rio's most important mining assets, although the particular assets concerned are not speculated upon.  From Chinalco's point of view the attraction would be to guarantee access to commodities as the global economy picks up - perhaps at favourable terms and in this context it would seem that some of Rio's copper, iron ore, aluminium and coal assets might form part of any such deal.

In addition Rio is said to be looking at the sale to Chinalco of a further stake in the company which would build the latter's holding up from the current 11 percent to around 15 percent or more through a share placement which could raise a further $1 billion.  Chinalco is currently sitting on a huge book loss on its earlier stake in Rio Tinto and such a deal would have the effect of averaging down the overall price per share paid.

There is little doubt that Rio Tinto is basically a sound company with phenomenal mineral assets which has found itself saddled with a huge amount of debt at just the wrong time. It is desperately trying to follow a debt reduction programme which doesn't end up diluting shareholder interests excessively - but in this environment beggars can't be choosers.  It does look that Chinalco is not interested in taking full control of Rio, but there is speculation that it is holding out for lower prices for the assets in which it is interested than Rio is prepared to contemplate at this time and this is where negotiations may be tense and faltering with Rio holding out for what it views as the long term value of the assets concerned.

Government-backed Chinalco almost certainly has access to whatever funds it needs to seal some kind of deal, given China's huge surpluses.  For Rio's shareholders the hope is that any deal which may be completed is not too dilutive - something which the Board seems to be fighting hard to achieve.  It is anticipated that any favourable outcome, without which Rio may have to go for a potentially dilutive major rights issue, will be known by February 12^th when Rio announces its year-end results.