Debt-laden global mining major Rio Tinto is considering an $8 billion (A$11.2 billion) rights issue as an alternative option, if Chinese aluminium giant Chinalco's proposed $19.5-billion stake increase in the company is turned down by the Australian government.
Investment banks JP Morgan Cazenove and Credit Suisse had agreed to underwrite the rights issue, after the company's annual results were announced in February. Earlier, Rio's chief financial officer Guy Elliot hinted in Singapore that the company had a ''Plan B'' in place, should the Chinalco's deal be blocked by Australian regulators or shareholders.
The recent success of HSBC's largest-ever rights issue in Britain and bond issue by Anglo American has prompted Rio to reevaluate the possibility of a rights issue as an alternative in case the Chinalco deal fails.
HSBC, one of the world's largest banking entities, raised $17.7 billion through the rights issue which was offered at 41 per cent discount to the last traded price.
Anglo American, another global mining giant with an identical BBB rating on negative watch from Standard & Poor's as Rio Tinto, raised $2 billion through bonds. BHP Billiton, which has a higher credit rating too tapped the bond market to raise $3.25 billion in March.
Rio Tinto's debt burden increased to a whopping $38.7 billion after it bought Alcan, the Canadian aluminium major in 2007. The company is hunting for a lifeline as the $9 billion debt payment is due in October this year and $10.5 billion by the end of 2010.
Chinalco's proposed $19.5 billion investment in Rio will increase its stake in the company from the present 9 per cent to 18 per cent with two seats in Rio's board and stakes in key assets including iron ore mines in Western Australia. (See: Chinalco invests $19.5 billion in Rio Tinto to raise stake to 18 per cent)
The deal has evoked widespread opposition from the public, politicians, shareholders and arch rival BHP Billiton on the issue whether the investment from the state-owned entity is in Australia's national interest. (See: Chinalco-Rio Tinto deal fuels political storm)
The Australian Competition and Consumer Commission gave the deal a go ahead stating that it was unlikely to result in a lessening of competition or to influence iron ore prices.
A final decision on the Chinalco-Rio deal by Australia's Foreign Investment Review Board (FIRB) and the treasurer is expected by June this year.
Rio Tinto Investors are not enthused over a possible rights issue as some believed that it could be worth less than selling the assets to Chinalco. Rio Tinto shares slumped 10.1 per cent to £22.38 ($33.27) on Monday morning in London.
Chinalco's local help
Chinalco has to win approval in the court of public and political opinion to be successful in its venture. It has to prove that its ambitions are neither imperialistic nor does it wish to seize control of Australia's natural resources.
Chinalco's local help FD Third Person, a Sydney-based agency specialising in financial transaction support, investor relations and crisis management, is expected to make sure that Chinalco's bid was "not played out in the court of public opinion" but allowed to be tested on its merits by the FIRB, which will make its ruling by June, and ultimately by Australian treasurer Wayne Swan.
The agency has worked on a number or Chinese projects in the past 12 months including the $1.3 billion SinoSteel takeover of Australian iron ore group Midwest (See: Sinosteel acquires controlling stake in Australian miner Midwest) in July 2008, and thr $844-million Hunan Valin investment in Fortescue Metals Group (See: Australia okays Valin stake in Fortescue Metals) Chinalco is its largest project so far.
Nevertheless, a local newspoll indicated that 59 per cent of Australians are against the Chinalco-Rio deal with 31 per cent favouring it. The newspoll also showed that 52 per cent of Australians are cautious about any foreign investment in mining companies, not just Chinese. However, 37 per cent believed that they should be allowed to invest.