Rio Tinto has gone on the offensive as its tactic to ward off a BHP Billiton bid, emphasisng a big increase in shareholder value as it moves ahead over the next few years.
Author: Lawrence Williams Posted: Monday , 26 Nov 2007
LONDON -
Rio Tinto in reality started mounting its defence against the probable hostile bid from BHP Billiton this morning amidst a change of sentiment from many analysts feeling that the BHP bid may yet not be formalised and Rio may manage to remain independent.
Key to Rio's defence is that it feels its assets are very much undervalued by the market and it is making a strong case for an upwards valuation which would force BHP to raise its proposed bid quite substantially if it has any chance of gaining the prize. This, coupled with the ever increasing likelihood that anti-trust concerns, particularly with regard to iron ore production, could keep any merger agreement tied up in red tape for a huge amount of time, may eventually force BHP to drop its bid before it has actually been made.
Speculation that a counter bid might be forthcoming from Chinese interests has so far been denied and ‘white knight' talk by some analysts is probably rather wide of the mark. If Rio has to fall to any other company, BHP would probably be its preference because of cultural similarities between the organisations. Any other major group stepping in would be probably be even more unwelcome to Rio management.
But firstly, Rio's bid defence is gathering momentum. This morning, Rio's CEO, Tom Albanese, has put forward his company's case in vigorous terms, amidst a flood of other information on the company's value and prospects. The tactics appear to be to boost Rio's value to a level which BHP will not be prepared to match in a bid. There has already been speculation that at least a 20 percent sweetener over BHP's original bid estimation would be required, and the Rio information is designed to raise the stakes even higher.
"The rise in global mineral demand is a trend that we expect to continue for decades because of fundamental demographic and economic shifts, especially in developing economies like China and India. We believe that the value in Rio Tinto is yet to be fully reflected by the market" said Albanese in a statement.
"We believe we have a better growth pipeline than our competitors, which puts Rio Tinto in a strong position to supply the metal-hungry world. We have the people, execution capability and resources to work smarter, faster and better than our competitors. We also believe our track record of delivery is unrivalled and we look forward with confidence to a hugely exciting future."
"The rise in global mineral demand is a trend that we expect to continue for decades because of fundamental demographic and economic shifts, especially in developing economies like China and India. We believe that the value in Rio Tinto is yet to be fully reflected by the market.
"We believe we have a better growth pipeline than our competitors, which puts Rio Tinto in a strong position to supply the metal-hungry world. We have the people, execution capability and resources to work smarter, faster and better than our competitors. We also believe our track record of delivery is unrivalled and we look forward with confidence to a hugely exciting future."
But more than rhetoric will be needed to stave off an unwelcome bid, and in an investor briefing today, Rio has been laying out its plans to increase shareholder value in the company which it feels would be threatened by a merger with BHP.
First and foremost, perhaps the problem it has to address most vigorously is the worry about the debt position built up largely through the Alcan acquisition. This is to be mitigated with a far higher range of asset disposals planned which would amount to "at least $15 billion" being sold off as the company uses the current situation as springboard for further rationalisation of its activities. Altogether Rio's strategic review has outlined up to $30 billion of potential divestments. These asset targets include:
Rio Tinto Alcan Engineered Products (global); Cortez/Pipeline (gold, 40 per cent stake, US); Greens Creek (zinc, lead, silver, 70 per cent stake, US); Rio Tinto Minerals Talc (Europe, Australia, North America); Northparkes (copper/gold, 80 per cent stake, Australia); Sweetwater (uranium project, not operational, US); Kintyre (uranium project, not operational, Australia).
On the company's main business, Rio highlights its iron ore, aluminium and copper assets in particular. On iron ore Rio says it has a conceptual pathway to production of over 600 million tonnes per annum, including 420 million tonnes per annum from the Pilbara. US$2.4 billion has been committed to develop the Mesa A and Brockman 4 iron ore deposits there. It has also targeted additional mineralisation in the Pilbara region of 20 to 30 billion tonnes and 8 to 11 billion tonnes at Simandou in Guinea (non-JORC compliant Rio Tinto estimates).
On aluminium Rio comments that it is in the Number one position in global aluminium with excellent growth and market outlook following integration of Alcan with a strong outlook for pricing and demand. The company's post tax synergy target from Alcan integration has increased to US$940 million per annum (up from US$600 million), deliverable by the end of 2009.
Rio is, of course, one of the world's leading copper businesses with an impressive pipeline of projects which are at a low position on the cash cost curve, and with some impressive new projects coming on stream giving it excellent long term growth prospects. Rio specifically highlights its big La Granja project in Peru (which was once in the BHP camp!) which has targeted mineralisation of 4 to 8 billion tonnes at a copper equivalent grade of 0.5 per cent (a non-JORC compliant Rio Tinto estimate). The mine has the potential to produce in excess of 500,000 tonnes per annum, double what was previously anticipated. It was acquired in 2005 for US$22 million plus a work commitment of US$60 million. First production is expected in 2014
Development work on Oyu Tolgoi in Mongolia - again one of the world's largest known copper/gold deposits - is said to be progressing well with significant further exploration potential. Average production is projected at 440,000 tonnes per annum of copper and 320,000 ounces per annum of gold over the projected life of the mine. While there significant extension options in copper, gold, and molybdenum at Kennecott Utah Copper operations and upside on the Resolution project. Nickel projects in Indonesia and the US too are said to offer a pathway to Rio becoming a top tier global nickel producer.
But perhaps a clincher in emphasising prospective value to shareholders is that Rio says it plans to increase the total 2007 dividend by 30 percent with further annual total increase of not less than 20 percent in each of the following two years reflecting the Board's confidence in the business and, by definition, in the global commodities marketplace. The company also expects an estimated post-tax cash flow enhancement of $1.7 billion per annum by 2010 from its activities worldwide.
There are a number of other areas where Rio deserves a rerating, not least in uranium where its producuing assets are rated way below those of other uranium producers by the market for no apparent reason. Diamonds are another growth area with a huge expansion at Canad's Diavik operation. And much, much more besides.
Overall a strong defence. Rio stock was up strongly in Australia today, but whether this was as a result of a market re-rating because of the Rio statements, or just an appreciation that BHP would have to pay substantially more for the company, remains to be seen.
BHP Price at posting:
0.0¢ Sentiment: Hold Disclosure: Held
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