Rio Tinto in JV with BHP

MELBOURNE/LONDON – Rio Tinto dumped plans for a landmark investment from China on Friday, opting instead to raise US$21 billion through a rights issue and a joint venture with one-time suitor BHP Billiton .

Rio’s US$19,5 billion deal with Chinese metals group Chinalco was put together in February at the height of the financial crisis in a bid to halve Rio’s US$38 billion debt.Its collapse on Friday under shareholder pressure left China, the world’s biggest steel-making nation, vulnerable to just two suppliers – the Rio/BHP combination and Brazil’s Vale – controlling 70 per cent of global iron ore trade.’This is a big slap in the face for China,’ said Paul Bartholomew at Steel Business Briefing in Shanghai.’Rio has effectively been talking to BHP behind Chinalco’s back and Chinalco is entitled to feel like a two-timed lover this morning,’ he said.Rio is to pay Chinalco a US$195 million break-up fee.RIO DEALSRio is raising US$15,2 billion in a fully-underwritten 21-for-40 rights issue, the fifth largest on record according to Thomson Reuters data.The Australian portion was priced at A$28,29 per share, a 58 per cent discount to last week Thursday’s closing price, while the London leg was priced at 1,400 pence for a 49 per cent discount.Rio said it and BHP, the world’s second- and third-largest iron ore miners respectively, would also combine their Western Australian iron ore operations into a 50-50 joint venture, generating savings of at least US$10 billion. BHP will pay Rio US$5,8 billion on completion. The deal has a break fee of US$275,5 million. Iron ore was key to a collapsed bid by BHP to take over Rio last year. The plans represent a victory for Rio shareholders who argued the Chinalco deal favoured the Chinese state firm and could give China greater influence over prices for key resources.NEW DEAL’We were not supporters of the Chinalco transaction. We’re happy to see this alternative approach to solving Rio’s issues with its debt,’ said Ross Barker, managing director of Australian Foundation Investment Co, Rio’s sixth-largest shareholder in Australia and a BHP shareholder.A BHP/Rio combination would supply around 270 million tons of ore a year, while Vale supplies around 240 million tons.’This deal has been 10 years in the making and well worth the wait,’ BHP Chief Executive Marius Kloppers told reporters.Rio and BHP agreed to keep their iron ore marketing separate, a move aimed at winning approval from regulators such as the European Commission, which last year raised concerns about BHP’s proposed takeover of Rio due to the potential impact on iron ore markets.Steelmakers on Friday vowed to fight the joint venture over worries that the link-up would lead to higher prices.’At present we cannot see how this JV could be in the public interest and thus it should not be allowed to proceed,’ said Ian Christmas, director general of the World Steel Association, whose members produce 85 per cent of global steel production.-Nampa-Reuters