05/06/2009 - 09:18

Chinalco deal dead: Rio Tinto

05/06/2009 - 09:18

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Rio Tinto has confirmed today its deal with Chinalco has been "terminated" with the miner instead opting to raise $US15.2 billion ($A19 billion) through a rights issue that will reduce its net debt to $US23.2 billion ($A29 billion).

Chinalco deal dead: Rio Tinto

Rio Tinto has confirmed today its deal with Chinalco has been "terminated" with the miner instead opting to raise $US15.2 billion ($A19 billion) through a rights issue that will reduce its net debt to $US23.2 billion ($A29 billion).

In a statement today, Rio said the Chinalco transaction which was first announced in February will no longer be pursued.

Rio has agreed to pay the $US195 million ($243 million) break fee to Chinalco.

"Since we announced the Chinalco transaction in early February, financial markets have seen a significant improvement," Rio chairman Jan du Plessis said.

"This has had two consequences - firstly, the financial terms of the Chinalco transaction became markedly less valuable and, secondly our ability to raise a level of equity appropriate for our needs on attractive terms has improved very considerably.

"In parallel, we had the opportunity to engage with BHP Billiton about the possibiity of establishing a highly attractive Western Australian iron ore production joint venture that would deliver substantial value to shareholders.

"Given these new circumstances, and coupled with the extensive feedback we have had from shareholders and others, the Boards have concluded that the formation of an iron ore production joint venture in Western Australia with BHP Billiton together with the Rights Issues deliver the best solution."

In a statement Chinalco president Xiong Weiping said he regretted the deal with Rio Tinto was off.

"It is with great regret that we are confirming the announcement made by Rio Tinto this morning concerning the withdrawal of the Rio Tinto boards recommendation of the transaction announced on February 12," Mr Xiong said.

"In recent weeks Chinalco has worked hard to respond constructively and engage with Rio Tinto to make appropriate amendments to the transaction terms ... to better reflect the changed market background and feedback from shareholders and regulators.

"As a result, we are very disappointed with this outcome.

"We continue to believe our proposal presented an outstanding value-creating opportunity for all Rio Tinto shareholders and would have provided a strong platform for a long term strategic partnership between the two companies," Mr Xiong said.

He said Chinalco would continue to explore opportunities to advance its strategic objectives and in the meantime would monitor developments at Rio Tinto, as the company's current largest single shareholder.

Under the rights issue, Rio Tinto plc will offer 21 new shares, priced at 1,400 pence each, for every 40 held to raise $US11.8 billion ($A14.7 billion).

Rio Tinto Ltd will also offer 21 shares, priced at a deeply discounted $28.29 each, for every 40 shares held to raise $US3.4 billion ($A4.2 billion).

The rights issue is fully underwritten by Credit Suisse Securities (Australia), J.P. Morgan Securities Australia, Macquarie Capital Advisers and RBS Equity Capital Markets.

Shares in Rio on the Australian Securities Exchange surged $7.90 to last trade at $74.80 at 11:39 AEST.

Rio said the rights issues will enable the group to fully meet its 2009 Alcan facility debt repayment and also substantially meet its 2010 repayment.

Rio had incurred a $US38 billion mountain of debt when it acquired Canadian aluminium producer Alcan Inc in 2007.

The debt was a primary concern to BHP Billiton when it called off its Rio takeover bid late last year.

Rio today added the rights issue will also reduce net debt to around $US23.2 billion which is well over its commitment made last year to reduce debt in 2009 by $US10 billion.

In addition, Rio said that in light of current uncertainties relating to the current macroeconomic outlook, the miner has decided it would "not be appropriate" to pay an interim dividend for the 2009 financial year.

However, the miner said it intends to pay a final dividend for the current financial year.

The company expects the total cash dividend payment for the 2010 financial year will be at least equal to that paid in 2008 of $US1.75 billion.

 

 

The announcement is below:

 

 

Highlights of the Rights Issues

Rights Issues consisting of 21 New Rio Tinto plc Shares offered for every 40 existing shares at 1,400 pence per share and 21 New Rio Tinto Limited Shares offered for every 40 existing shares at A$28.29 per share to raise approximately US$15.2 billion of gross proceeds, comprising approximately US$11.8 billion for Rio Tinto plc and approximately US$3.4 billion for Rio Tinto Limited.

- The Rights Issues will enable the Group to meet its Alcan facility debt repayment obligations fully in 2009 and substantially in 2010.

- As a result net debt will be reduced to approximately US$23.2 billion; exceeding the commitment made in December 2008 to reduce net debt by US$10 billion by the end of 2009.

- The Rights Issues and debt repayments will strengthen the Group's financial position in a period of continuing uncertainty and allow it to take advantage of future value-creating opportunities.

- The subscription prices represent discounts of approximately 38.2% and 47.2% to the theoretical ex-rights prices (TERPs) of 2,265.6 pence and A$53.61 per New Rio Tinto plc Share and Rio Tinto Limited Share respectively; and discounts of approximately 48.5% and 57.7% to the Closing Prices of Rio Tinto plc and Rio Tinto Limited on 4 June 2009; respectively.

Agreement with BHP Billiton

In addition, Rio Tinto and BHP Billiton today announced that they have signed a non-binding agreement to establish a production joint venture encompassing the entirety of both companies' Western Australian iron ore assets.

The joint venture will include all current and future Western Australian iron ore assets and liabilities and will be 50:50 owned by Rio Tinto and BHP Billiton. In order to equalise the contribution value of the two companies, BHP Billiton will pay Rio Tinto US$5.8 billion for equity-type interests at financial closing.

The establishment of the joint venture will be subject to execution of binding agreements as well as regulatory and shareholder approvals. The agreement signed today includes binding obligations on both parties regarding exclusivity and payment, in certain circumstances, of a break fee if the transaction does not complete.

Further details of the proposed joint venture with BHP Billiton are set out in a Rio Tinto press release dated today which can be found on Rio Tinto's website.

Update on Chinalco Transaction

The transaction announced and recommended by the Boards will no longer be pursued. Rio Tinto and Chinalco have discussed potential amendments to the transaction to address the improved financial markets; as well as shareholder and wider stakeholder feedback. Despite making good progress, a revised version of the original agreement has not been realised and those discussions have now ceased. As a result the Boards have withdrawn their recommendations for the original transaction and Rio Tinto has terminated the agreement. Rio Tinto will pay Chinalco the agreed break fee of US$195 million.

Rio Tinto remains interested in potential future collaboration with Chinalco and continues to recognise the importance of China and building strong relationships there.

Jan du Plessis, Chairman of Rio Tinto said,

"Since we announced the Chinalco transaction in early February, financial markets have seen a significant improvement. This has had two consequences - firstly, the financial terms of the Chinalco transaction became markedly less valuable and, secondly our ability to raise a level of equity appropriate for our needs on attractive terms has improved very considerably.

"In parallel, we had the opportunity to engage with BHP Billiton about the possibility of establishing a highly attractive Western Australian iron ore production joint venture that would deliver substantial value to shareholders.

"Given these new circumstances, and coupled with the extensive feedback we have had from shareholders and others, the Boards have concluded that the formation of an iron ore production joint venture in Western Australia with BHP Billiton together with the Rights Issues deliver the best solution. This course of action will assist us to address Rio Tinto's short- and medium-term debt repayment obligations whilst enabling us to retain strategic flexibility, and to preserve and grow long-term shareholder value.

"Over recent weeks we were also endeavouring to achieve a new agreement with Chinalco. We were disappointed that we were unable to find a solution acceptable to both sides, but we believe we have established a good relationship with Chinalco and we remain very positive about the potential for future collaboration."

Tom Albanese, Chief Executive of Rio Tinto said,

"At the end of 2008, the Group announced a debt reduction programme aimed at improving its financial position and the Rights Issues, along with the initiatives we announced at that time are designed to enable the Group to improve its financial position, enhance liquidity, support our goal of restoring our long-term credit rating to single A and increase our strategic flexibility. In addition, in the first quarter of 2009, we also announced agreed divestments totalling US$2.5 billion and in April we took advantage of the opening of the bond markets to raise US$3.5 billion.

"We believe that the long term demand outlook for our products remains strong based on fundamental economic and demographic trends. However, the global economic downturn and the difficult trading conditions experienced, particularly in iron ore and aluminium, have adversely impacted our near-term cash flows and broader financial position.

By strengthening our balance sheet through the Rights Issues and other initiatives, the Boards believe we will be better positioned to respond rapidly to an improvement in market conditions with the opportunity to use future cash flows to invest in growth projects."

Rights Issues

Due to the Group's dual-listed structure, the capital raisings are being structured as two inter-conditional Rights Issues, with Qualifying Rio Tinto plc and Qualifying Rio Tinto Ltd shareholders being offered 21 New Rio Tinto plc Shares or New Rio Tinto Limited Shares for every 40 Existing Rio Tinto plc Shares or Existing Rio Tinto Limited Shares held, as applicable. The Rights Issues are fully underwritten1, subject to customary terms and conditions, and are expected to raise gross proceeds of approximately US$15.2 billion, with approximately US$11.8 billion expected to be raised by the Rio Tinto plc Rights Issue and approximately US$3.4 billion by the Rio Tinto Ltd Rights Issue.

The subscription prices of 1,400 pence per New Rio Tinto plc Share and A$28.29 per New Rio Tinto Limited Share are based on an equivalent price per New Rio Tinto plc Share and per New Rio Tinto Limited Share of US$22.94 converted into pound sterling and Australian dollars at the exchange rates published in the London edition of the Financial Times on 4 June 2009. The subscription prices represent a discount of approximately 38.2% and 47.2% to the theoretical ex-rights prices (TERPs) of 2,265.6 pence and A$53.61 per Rio Tinto plc Share and Rio Tinto Limited Share respectively, and a discount of approximately 48.5% and 57.7% to the Closing Prices on 4 June 2009 of Rio Tinto plc and Rio Tinto Limited respectively.

The Rights Issues are being undertaken using a traditional structure with a rights trading period.

The Boards intend to apply the net proceeds in the mandatory prepayment of the tranches of the Alcan credit facilities due in October 2009 (as at 30 April 2009, US$7.15 billion was drawn under this tranche) and in October 2010 (as at 30 April 2009, US$8.1billion was drawn under this tranche).

Dividends

In light of the current uncertainties in relation to the macroeconomic outlook, the Boards have decided that it would not be appropriate to pay an interim dividend for the current financial year. It will be our intention to pay a final dividend for the current financial year subject to satisfactory trading results. The Group expects that the total cash dividend payment for the 2010 financial year will be at least equal to that paid for 2008 (US$1.75 billion). The Group remains committed to a progressive dividend policy over the longer-term.

Credit Suisse Securities (Europe) Limited, J.P. Morgan Cazenove Limited and Macquarie Capital (Europe) Limited are acting as joint global co-ordinators.

Credit Suisse Securities (Europe) Limited and J.P. Morgan Cazenove Limited are acting as joint sponsors and corporate brokers with respect to the Rights Issue for Rio Tinto plc. The Rights Issue for Rio Tinto plc is fully underwritten by Credit Suisse Securities (Europe) Limited, J.P. Morgan Securities Ltd. on behalf of its affiliate J.P. Morgan Cazenove, Deutsche Bank AG, London branch and Morgan Stanley & Co International plc as joint bookrunners and Macquarie Capital (Europe) Limited, RBS Hoare Govett Limited and Société Générale as co-bookrunners.

The public Rights Issue for Rio Tinto Limited is fully underwritten by Credit Suisse Securities (Australia) Limited, J.P. Morgan Australia Limited, Macquarie Capital Advisers Limited and RBS Equity Capital Markets (Australia) Limited as joint bookrunners and Deutsche Bank AG, Sydney branch, Morgan Stanley Australia Securities Limited and Société Générale as co-bookrunners.

A prospectus relating to the Rights Issues, prepared in compliance with UK regulatory requirements will be available on Rio Tinto's website, www.riotinto.com in due course and will contain further details and the full terms and conditions of the Rights Issues. In Australia, the Rio Tinto Limited Rights Issue will be made under provisions of the Corporations Act which allow rights issues to be made without a prospectus. An Australian offer document, which will contain the full terms and conditions of the Rio Tinto Limited Rights Issue, will also be made available on Rio Tinto's website. Neither the Prospectus nor the Offer Document will constitute a prospectus for the purposes of the Corporations Act.

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