Rio Tinto, the world's third-largest mining company, yesterday launched a formal A$3.9 billion ($3.9 billion) bid for Australian coal miner, Riversdale Mining- a move that has already made an Indian state-owned consortium to weigh a counter bid in order to gain control of 13 billion tones of coking and thermal coal in Mozambique.

The formal offer from the Anglo Australian miner came after Sydney-based Riversdale earlier this month had announced that it was in talks with Rio Tinto about an A$15 a share or around A$3.5 billion takeover offer and hinted that it was in talks with at least one other unnamed suitor. (See: Rio Tinto may overtake Tata Steel as Riversdale's largest shareholder)

Rio Tinto's latest offer, which is contingent on acceptance from half of Riversdale's shareholders, has been hiked by A$ 1 from or $16 per share from its earlier offer of A$15-a-share.

All the directors of Riversdale barring one and a few institutional investors have agreed to tender their 14.9-per cent interest to Rio Tinto's offer. (See: Tata Steel to evaluate Rio Tinto offer for Riversdale).

Tata Steel's Singapore-based subsidiary Tata Steel Global Minerals Holdings, which holds a 24.21-per cent stake and a seat on the board of Riversdale abstained from voting on the deal - an indication that the world's seventh-largest steel company has kept its option open of making a counter offer.

Other stake holders in Riversdale are Brazilian steelmaker Companhia Siderurgica Nacional (CSN) with 16.29-per cent and San Francisco, California-based hedge fund Passport Capital with 16 per cent.

Tata Steel has said that it is a strategic investor in Riversdale, and is not likely to sell its stake since it also holds a 35-per cent interest through a joint venture with Riversdale in its Benga coking coal project located in the Tete Province of Mozambique as well as a 40 per cent share of the off-take.

Riversdale yesterday terminated a June 2010 non-binding heads of agreement with  Wuhan Iron and Steel (Wisco), where China's third-largest producer of steel had proposed to acquire a 40 per cent interest in Riversdale's Zambeze coking and thermal coal project for $800 million and an 8 per cent stake in the miner at $10 a share.

Riversdale's assets

• Riversdale has 21 exploration licenses in excess of 250,000 hectares in Mozambique having high quality coal resources of over 13 billion tonnes located in the Tete-Moatize area
• It is developing the Benga and Zambeze coking and thermal coal projects, which is among one of the world's largest untapped coal reserves
• The Benga project, in which Tata Steel holds 35-per cent interest has the potential to produce 20 million mt of coal (coke strength of 71 per cent) per year for a period of more than 25 years
• Phase 1 production is expected to start next year, with an initial output  of 1.7-million tons a year of high-quality hard coking coal and 0.3-million tons a year of export thermal coal
• The Zambeze project is estimated to hold around 9 billion tonnes coal Resource (coke strength ranging between 67-73 per cent), and has the potential to be significantly larger than the Benga project with initial production expected to commence in 2014.

Infrastructure costs
The potential buyer of Riversdale will have to spend $1 billion upwards on infrastructure and development costs apart from the nearly $5 billion to seal the deal for Riversdale, bring the total cost of the acquisition to around $6 billion.

Riversdale had held talks with the rail concessionaire on gaining access to the Sena railway line, which connects the Tete-Moatize area to the Port of Beira.

It has also formed a pact to partially use Vale infrastructure in the area. Vale is the largest developer of coal mines in Mozambique and has mines adjacent to Riversdale Benga and Zambeze projects.

The mine site lies near Tete, the provincial capital. It has direct access to the Zambezi River.

Major infrastructure including power, water, rail and sealed roads will have to be developed along with upgrading the port of Beira since the mines have direct access to the Zambezi River with transhipment at Chinde and the Nacala railway corridor.

The government of Mozambique today announced that it will build a new bridge across the Zambezi River at a cost of 132 million to allow coal to be transported from Tete province. The bridge is expected to be finished by January 2014.

Rio Tinto
For Rio Tinto, this acquisition, if successful, would be its biggest since its 2007 takeover of Canadian aluminum maker Alcan for $38 billion in cash.

The deal left Rio Tinto burdened with nearly $48 billion in debts and the onset of the recession made Alcan look like its biggest acquisition blunder since the global demand and price for aluminum crashed.

The deal also forced Rio, the world's third-largest mining company, to sell off some of its non-core assets including its coal mines in the US and South Africa.

But Rio Tinto will need the backing of Riversdale's three largest shareholders – Tata Steel, Passport Capital and CSN, together controlling over 50 per cent of Riversdale.

CSN and Passport Capital are amenable to selling their stake but have said that they will not sell below A$20 a share.

Potential Indian bid
With Rio Tinto tabling its A$3.9-billion offer on the table, a bidding war is likely to emerge for Riversdale from other global miners like Vale of Brazil, Switzerland-based Xstrata and South Africa focused Anglo American and Luxemburg-based steel major ArcelorMittal.

International Coal Ventures Ltd (ICVL), a joint venture of five state-run Indian companies: Steel Authority of India Ltd., NTPC Ltd., NMDC Ltd., Rashtriya Ispat Nigam Ltd. and Coal India Ltd have already moved in by appointing Citibank to advise it on whether it should bid and to conduct due diligence if it decides to go ahead for Riversdale. (See: Indian consortium ICVL to appoint Citigroup for Riversdale due diligence)

ICVL has asked Citibank to submit its report in two weeks, which will coincide with Riversdale sending Rio Tinto's offer to its shareholders.

Tata Steel has said that it is a strategic investor in Riversdale, but today said in a regulatory filing that it would "evaluate the takeover bid in the context of other alternatives available to Tata Steel."

The company however did not reveal what the other alternatives were.

The Indian steel giant, belonging to the $67-billion Tata Group is no stranger to large ticket acquisitions, having paid $12.11 billion to acquire Europe's largest steel maker Corus Steel in 2007.

Although Tata Steel is looking for captive coal mines for Corus, analysts believe that the company, which currently has high debts, may not go in for buying the whole of Riversdale, which has coal resources exceeding what Tata Steel requires for its operations in Europe.

Tata Steel also said today in a separate filing that it has received shareholder approval to raise long-term finances. It did not spell out where it would spend the money raised.

Tata Steel has the option of launching a counter bid in partnership with India's biggest iron-ore producer, NMDC, which had in January 2010 signed a Memorandum of Understanding with Tata Steel for exploring possibilities of entering into joint ventures for acquisition, exploration and development of mines.

India, which holds one of the largest coal reserves in the world, does not have good quality coal and its demand of coal outstripping supply. India produced 531.5 million tonnes in 2009-10

According to Crisil Ltd, a unit of Standard & Poor's, demand for coal in India could be 1.4 billion metric tons by 2020, which is largely used by the power generating and steel industry.

There are a total of 86 upcoming coal-fired power projects currently in India, of which 29 are near completion, 29 are under construction and another 28 are at the development stage, awaiting government approvals.

Whoever wants control of Riversdale will ultimately have to make an offer of around A$20 a share.