Rio Tinto?s $3.9 billion bid for Riversdale Mining formally opened on Tuesday. It?s going to be a nervous couple of weeks for the bid team as they wait to see whether their bid for the Mozambique coal miner is caught up in the geopolitics of resource security.
Riversdale controls a vast but largely undeveloped coking coal resource in Mozambique that has already attracted the interest of Indian, Chinese and Brazilian steelmakers.
India?s Tata Steel owns 24.2 per cent of the group and has a 35 per cent interest in one of its projects. Tata?s representative on the Riversdale board has so far abstained from making a recommendation on the offer.
Among Riversdale?s other strategic shareholders a Brazilian steelmaker, CSN, owns about 13 per cent. A US hedge fund, Passport Capital, owns 16 per cent, half of which has been committed to Rio under a pre-bid agreement.
China?s Wuhan Iron and Steel had signed a non-binding heads of agreement to acquire a 40 per cent interest in the giant Zambeze project and to take up an 8 per cent shareholding in Riversdale itself that was terminated by Riversdale after the Rio Tinto bid emerged. That agreement did, however, signal China?s interest in the project.
The strategic significance of the 9 billion tonne Zambeze resource was underscored last month when a consortium of state-owned Indian steel and energy companies, International Coal Ventures, hired Citigroup to urgently investigate a possible counter-bid to Rio Tinto?s $16 a share offer. By now ICV should have received Citi?s assessment.
Both India and China have been scouring the world to secure access to, or control of, the key inputs for their steelmakers.
The seaborne trade in coking coal is dominated by Australian resources, particularly the Bowen Basin mines in Queensland, where the floods have disrupted supply and highlighted the vulnerability of the steelmakers to their reliance on one region.
The push by the Bowen Basin producers, led by BHP, to impose shorter-term and market-related pricing on the mills ? in line with what has happened in the iron ore market ? would, by underscoring the market power of the big coking coal producers, provide additional motivation for diversifying the mills? sources of supply.
Riversdale?s resources are strategic because they aren?t located in Australia and, for the Indians, because they represent the closest large-scale coking coal resource to India itself. Mozambique has an Indian Ocean seaboard.
The Rio Tinto offer represents a threat to India?s interests, not just because it would bring the Mozambique resources under the control of the trio of big resource groups that dominate the sector ? BHP Billiton, Rio Tinto and Anglo American ? but because of Rio?s increasingly close relationship with China.
Despite the initial tensions created by the collapse of its proposed $US19.5 billion strategic alliance with China?s Chinalco, Rio Tinto has subsequently repaired the relationship by bringing Chinalco into its giant Simandou iron ore project in Guinea, creating a joint venture with it to explore within China and talking to it about an interest in the Oyu Tolgoi copper-gold project in Mongolia.
The Indian steelmakers would be deeply concerned that if Rio?s bid succeeds the eventual output from the Mozambique resources would be directed to China.
The problem for the Indians is that while they probably have the financial capacity to counter-bid, and Tata?s presence on the Riversdale register provides a tactical advantage, they don?t have the operational expertise to develop the vast open-cut mine envisaged for the Zambeze project and the rail and port infrastructure that will have to be built to move the coal.
That explains speculation that they could team up with Anglo, which would be unlikely to challenge Rio Tinto on its own.
RIV Price at posting:
$16.53 Sentiment: Buy Disclosure: Held
