Rio plans US$15.2b in rights issue

Friday 5th June 2009

Rio Tinto, the world’s third-biggest mining company, will raise as much as US$15.2 billion in a fully-underwritten rights issue to repay debt after rejecting a sale of assets to Chinalco and reaping US$5.8 billion from an iron ore joint venture with BHP Billiton.

Shareholders will be offered 21 new shares in dual-listed Rio for each 40 held, with the offer split between the UK and Australian listed shares, at 1,400 pence and A$28.29 respectively, the company said in a statement.

The prices represent discounts of 49% and 58% to the shares’ closing prices yesterday. Rio jumped 10% to a seven-month high A$73.80 on the ASX after the announcement and BHP climbed 8% to A$37.87.

The deal scuppers a US$19.5 billion investment from Aluminum Corp. of China, or Chinalco which was to have secured long-term access to supplies of raw materials for the Chinese company. BHP and Rio will form a 50-50 iron ore venture that encompasses their Western Australian iron ore assets and will save them a combined US$10 billion.

“Since we announced the Chinalco transaction in early February, financial markets have seen a significant improvement,” Rio chairman Jan du Plessis said. That’s made the financial terms of Chinalco’s offer “markedly less valuable” while bolstering Rio’s ability to raise equity on attractive terms, he said.

Rio has been under pressure to slash its US$38.9 billion of debt, which soared when it acquired Alcan Inc. in 2007. The rights issue will allow Rio to meet payment obligations of its Alcan facility this year and “substantially” in 2010, while whittling down total debt to US$23.2 billion, it said today.

Du Plessis said it was unsuccessful over recent weeks in trying to forge a new agreement with Chinalco though Rio is optimistic about the potential for future collaboration. Chinalco’s offer would have been the largest single foreign investment by a Chinese company, according to Bloomberg.

Rio and BHP may supply 75% of China’s iron ore supplies this year.

Under the dual listing arrangement, about US$11.8 billion will be raised by Rio Tinto Plc in London and US$3.4 billion for Rio Tinto in Australia.

The agreement with BHP, which includes break fee provisions, comes after Rio rejected a hostile takeover offer from the world’s biggest mining company in November.

“We believe the long-term demand for our products remains strong, based on fundamental economic and demographic trends, Rio chief executive Tom Albanese said. By strengthening its balance sheet, Rio if better placed to withstand “the global economic downturn and the difficult trading conditions experienced, particularly in iron ore and aluminium,” he said.

Rio won’t pay an interim dividend “in light of the current uncertainties in relation to the macroeconomic outlook” though it intends to make a full-year payment, it said.

The rights issue is underwritten by Credit Suisse Securities (Australia), JP Morgan Australia, Macquarie Capital Advisers and RBS Equity Capital Markets (Australia) as joint bookrunners. Deutsche Bank, Morgan Stanley Australia and Societe Generale will be co-bookrunners.

Businesswire.co.nz

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