RIO - Rio Tinto

http://www.businessspectator.com.au/bs.nsf/Article/A-stinker-of-a-deal-for-Rio-$pd20090212-P6R79?OpenDocument&src=sph


one of the rare occasions i completely agree with kohler

It will be very interesting to watch the SP in the next few weeks. Lets see how the magicians can make debt disappear.

I think this convertable notes and the Chinalco deal is all smoke & mirrors. It is much less transparent than a straight out rights issue.

I still think the board is all about maintaining the SP because the value of their performance options are linked to the SP and of course their reputations.

It still dont understand how a Company can be worth more (in terms of market capitalisation) by selling it's assets. The biggest fear is ROI selling off some of Australia's best iron ore deposits at a basement bargain price.

I think there's a bit more than smoke and mirrors involved here.
RIO have a lot of debt, some of which has to be paid down in the medium term either by the sale of assets or by issuing more capital. Whichever way, some hard cash is going to change hands and end up being paid back by RIO to the financiers.

It still dont understand how a Company can be worth more (in terms of market capitalisation) by selling it's assets. QUOTE.

Only because if done well, it avoids having to later sell off at a much less advantageous price. In theory, the company is stronger, financially, after the sale and the shares are worth more.
OZL is in this position. Their risk is that if they can't make good sales they will pass into the hands of their bankers who will sell out for the amount of their loans leaving little or nothing for shareholders. RIO's situation is nothing like this, of course.

Rio make me so mad. They typify the bullish short term approach of the current era. Why did they have to go into mining? They should have just kept on doing what they did best - making underwear.

Dangerous said:

Rio make me so mad. They typify the bullish short term approach of the current era. Why did they have to go into mining? They should have just kept on doing what they did best - making underwear.

Click to expand...

Dangerous

Rio is still making underwear.

Excepting there products developed some holes from the excessive size of their assets. They got exposed so now Rio decided to trim the size of their assets and repair the holes in the underwear with Chinese mending.

I hate been screwed three times.

Once when the Directors paid too much for the assets.

Twice when the assets get sold off cheap cheap.

Trice when the covertable bonds mature and shareholders get diluted.

Interesting article!!!

http://www.theaustralian.news.com.au/business/story/0,28124,25046776-5005200,00.html

Since I disagree with the decisions of the Directors of RIO,
the only course of action available to me is to sell my shares in RIO. At $50 I am not complaining. This I will do.

But as an Australian I am disappointed that some Pom in the UK can sell off part of Australia. I agree with media pundits that Rudd & Swan should take a close look into the proposed deal and put the interest of Australia ahead of Skinner & Albanese.

From some commentators the stake in Hammersley is already worth the entire 19 billion.

vincent191 said:

Since I disagree with the decisions of the Directors of RIO,
the only course of action available to me is to sell my shares in RIO. At $50 I am not complaining. This I will do.

But as an Australian I am disappointed that some Pom in the UK can sell off part of Australia. I agree with media pundits that Rudd & Swan should take a close look into the proposed deal and put the interest of Australia ahead of Skinner & Albanese.

From some commentators the stake in Hammersley is already worth the entire 19 billion.

Click to expand...

I guess the question has to be though, do you let RIO sell its assets to strengthen its balance sheets? or allow it to continue on its merry way and potentially be smashed later on if market conditions continue to worsen.

I don't hold RIO but it seems an incredibly short sighted decision to sell off so much of the business rather than raise new capital, albeit at a hefty discount presumably. After all, companies such as Wesfarmers, Westfield and Suncorp have been able to raise capital, admittedly smaller sums but substantial nevertheless.
Unless one subscribes to the view that capital and commodity markets will never recover it appears to be one of the worst boardroom decisions for a long time.
The fact that the chairman-elect walked, or was pushed, indicates to me that the capital-raising option was never properly explored.

Oldblue......I agree with what you say. Selling your income producing assets (especially the jewels in your crown) is just like selling off your best sources of future earnings.

This is bad unless you are in dire straits and have no further venues (like Oz minerals) and this is not the case with RIO.

Sure, a rights issue will push the SP down but at least it gives the existing shareholders the option to buy in at the discounted price and enable the Company to hold on to its prized assets and the sources of it's future earnings.

Secondly, if your 20% shareholder is also your major customer, can he have an undue influence on your on-going selling price??

Not only have RIO sold 20% of the farm, but have they also compromised the selling price of it's future produce???

As an aside, the proposed deal says a lot about the different approaches to business by Chinalco and RIO.
The former is adopting a strategy that delivers substantial benefits now but will take 60 years to come to full fruition.
RIO is looking for an instant solution to its problems.

The deal does give RIO a great strategic placement/competative advantage in the Chinese market however....

Not much interest in this thread - is this why?

Commentary
7:26 AM, 26 Mar 2009
http://www.businessspectator.com.au/bs.nsf/Article/Trust-is-lost-$pd20090326-QGRQD?OpenDocument&src=ei


Robert Gottliebsen

Trust is lost

The Rio Tinto-Chinalco 600 page agreement morass is just another illustration of how trust in the business community is rapidly evaporating. Over time, lack of trust in business executives and organisations will emerge as one of the biggest problems in the world, with repercussions that go way beyond the immediate difficulties we are now facing.

Who could have thought the chief executives of banking/insurance organisations like Citibank, Merrill Lynch, Bank of America, AIG, Lehman, Royal Bank of Scotland and many others would be so stupid as to be involved in loaning billions to people who had no hope of servicing the debt; gambling that big US companies would go broke; lending to Eastern European residents in Swiss francs and many more such crazy schemes.

And many banking and insurance executives responded by arrogantly paying themselves multi-billion dollar bonuses for their 'good work' in sending or almost sending their organisations to the wall. These are people whom we looked up to and who betrayed our faith. Trust has been lost.

In Australia we saw property trusts go on massive borrowing binges even though their stock holders were retirees who wanted income, not high risk. Again, trust has been lost.

Banks gave lines of credit and loans and are now pulling the rug from under their customers. Trust has been lost.

We believed the ratings that the rating agencies gave us. They were next to useless. Trust has been lost

Directors signed contracts with CEOs that involved big exit payments even if the CEO failed. Trust has been lost.

The accounting bodies set up accounting standards that produced results that were not suitable for stock analysts so the institutions and companies set up their own albeit imperfect standards. That is now being fixed, but once again trust has been lost.

I could go on and on but in a society where big corporations have lost the trust of the community there are going to be big reductions in executive salaries globally. The publication of executive salaries which originally started a bidding auction will work the other way as companies say: “Our rivals have cut their CEO salary – we should do the same.”

In the absence of trust there will be much stricter regulations and, as always, we will go too far. In Australia we are going to greatly reduce productivity with a set of industrial relations laws that go back a quarter of a century. The workers say the executives have been feathering their nests – “and now it's our turn”. Unemployment will go through the roof, but too bad. Trust has been lost.

There's plenty more to be said on this topic, but back to Rio Tinto. With the benefit of hindsight the company paid too much for Alcan and, worse still, did not raise sufficient equity at the time and/or did not work fast enough to sell assets to reduce borrowing so that they were selling and/or raising capital at the same price level as the Alcan purchase. They should also have at least talked with BHP. Trust has been lost.

My experience is that once trust is lost, particularly if there are large losses, then the group who created the problem rarely have the talents to get out of it. Executive and board ranks usually must be changed. And so America and the UK need to flush out all the executives who made the bad decisions and replace them with lower paid people who can do the job.

The 600 page Rio Tinto agreement morass is a series of agreements that are often included in joint ventures. They have been strung together without any understanding of the total control effect of the combination of all the transactions and agreements.

A Leigh Clifford (former Rio Chief) who had total trust might have been able to convince people that all was well. Conversely he may never have gone down such a path.

The Alcan and BHP errors that are on the slate of Clifford's successors means that trust in Rio Tinto has been lost. That’s why we will look very suspiciously at what it being proposed and what we see looks very different from what the parties say is there.

RIO and Chinalco

Rio have just paid a dividend of about 2% on the current share value. Chinalco is being offered convertible bonds at 9.2%.

How does this work for current shareholders?

Re: RIO and Chinalco

And RIO announced yesterday it would offer 5 and 10 year bonds with respective rates of 8.95% and 9.00%.

I haven't read the prospectus so I don't know if these are also convertible.

One thing i find very interesting is how adamant Rio's chairman was about BHP's takeover, even when it was obvious that as conditions deteriorated it was actually in the shareholder's best interest at the time.

Now he is equally adamant that Chinalco's proposal is the best for Rio, despite the fact that a lot has changed since that agreement was reached at the current bottom of the resources sector. They are not even prepared to look at options in light of changed circumstances.

a lot of companies have now that the markets recovered from their lows gone back to the markets to raise capital and the result of that on their share price is far less detrimental than what it would have been a few months back. And how come Chinalco's offer his not reevaluated in the current circumstances. i do remember reading somewhere that CEO's do get rewarded for clinging deals for asset sales etc, but apparently don't get anything under share issues. does any one have any insight on that? and is it really the best for Rio right now to carry on with Chinalco despite the fact that they are selling their better performing assets as part of the agreement, not to mention that the bond issue part does not seem so attractive anymore either....

Or is the silence on this thread speaking for itself...

nikemi said:

One thing i find very interesting is how adamant Rio's chairman was about BHP's takeover, even when it was obvious that as conditions deteriorated it was actually in the shareholder's best interest at the time.

Now he is equally adamant that Chinalco's proposal is the best for Rio, despite the fact that a lot has changed since that agreement was reached at the current bottom of the resources sector. They are not even prepared to look at options in light of changed circumstances.

a lot of companies have now that the markets recovered from their lows gone back to the markets to raise capital and the result of that on their share price is far less detrimental than what it would have been a few months back. And how come Chinalco's offer his not reevaluated in the current circumstances. i do remember reading somewhere that CEO's do get rewarded for clinging deals for asset sales etc, but apparently don't get anything under share issues. does any one have any insight on that? and is it really the best for Rio right now to carry on with Chinalco despite the fact that they are selling their better performing assets as part of the agreement, not to mention that the bond issue part does not seem so attractive anymore either....

Or is the silence on this thread speaking for itself...

Click to expand...

Well it looks like i am not the only one asking these questions

0502 GMT [Dow Jones] Rio Tinto (RIO.AU) says logic of Chinalco deal remains compelling. But Southern Cross Equities director Charlie Aitken disagrees. He calculates currency-adjusted value of first tranche of proposed US$7.2 billion convertible bond issue at A$68.90 vs current share price of A$70.70. "In the space of just three short months, 'the superior value for RIO shareholders' has now become 'superior value for Chinalco shareholders'." Even more damaging for management, says Aitken, is recent AUD/USD strength, which makes Chinalco deal even less attractive. More important is how much more undervalued Chinalco's offer would be when commodity prices begin to recover to anywhere near peak cycle levels. "I suspect the answer will be that RIO is giving away stakes in strategic assets at firesale prices," says Aitken. RIO's comments made at CEDA conference in Melbourne, on topic of foreign investment and the mining industry. RIO last up 2.6% at A$70.89. (DWR)

So in the love story between Chinalco and Rio, the two are now being called Colleen and Robert.
Colleen is reportedly being directed by the State Council of China. Not surprising really. The increased stake is seen by China as a strategic investment in the face of the pricing behaviour of the Australian iron ore majors in 2007-8 which certainly wasn't designed to sustain long term Australia-China relationships, and the onetime threat of a BHP-Rio merger.
Follow it from the Chinese perspective in http://english.caijing.com.cn
And keep in mind that Vale has twelve 400,000 tonne carriers on order from Chinese shipyards. Dredging needed at Pt Hedland perhaps under the federal government infrastructure package to remain competitive?