On Friday, June 5, Australian mining company Rio Tinto, Australia's biggest and the world's second largest iron ore producer, confirmed its plans to tap shareholders for US$15.2 billion and has signed a non-binding agreement with Australia's second largest iron ore producer BHP Billiton to establish a production joint venture covering the entirety of both companies' Western Australian iron ore assets. Rio Tinto has thus walked away from the proposed US$19.5 billion deal with China's Aluminum Corp. of China (Chinalco).
Accordingly, Rio Tinto has announced the cancellation of the Chinalco venture and that it will launch a US$15.2 billion dollar rights issue to allow the company to solve its debt problems. "The transaction announced and recommended by the boards will no longer be pursued," Rio said in a statement, referring to the Chinalco deal. Rio Tinto will have to pay a US$195 million break fee to Chinalco.
According to another statement released by Rio Tinto, the proposed new joint venture will encompass all current and future Western Australian iron ore assets and liabilities and will be owned 50:50 by BHP Billiton and Rio Tinto. The agreement, expected to save the firms at least US$10 billion, means the assets in the vast region will be shared equally between the two companies, and involves BHP handing over US$5.8 billion for Rio Tinto equity.
The agreement excludes HIsmelt, any secondary processing facilities, and operations and future business development outside Western Australia.
Formation of the joint venture is expected to be completed around mid-2010.
The deal announcement came after speculation which claimed that Rio Tinto's planned US$19.5 billion deal with Chinalco had collapsed. Chinalco said that it was "very disappointed" about the failure of the deal, adding that it would be paying very close attention to the tie-up between Rio Tinto and BHP Billiton.
On February 12, Chinalco agreed to double its stake in Rio Tinto to 18 percent from 9.3 percent, and to take minority stakes in some of Rio Tinto's assets in return for a total US$19.5 billion cash injection to help Rio Tinto to repay its US$39 billion debt.
Following speculation that the deal was about to fall apart, Rio Tinto yesterday issued a statement saying that it was "pursuing a range of options, some of which are at an advanced stage, for maximizing shareholder value and improving the group's capital structure."
Speaking on March 26 at a mining conference in Singapore, Rio Tinto's CFO Guy Elliott said that the company had a "Plan B" to address its debt burden if the Chinalco deal failed to go though. Mr. Elliott said that the group could sell shares, bonds, assets, reschedule debt or combine the four options under an alternative plan to pay down its debt.
BHP Billiton, which last year walked away from a US$66 billion takeover bid for its mining rival, has been actively lobbying against the Chinalco alliance for some time.
The collapse of the Chinalco venture, which would have been the biggest deal in Australian corporate history, has spared the Australian government difficult foreign policy decisions.
However, the venture to combine elements of the two miners' iron ore operations in the Pilbara region of Western Australia will face tough regulatory hurdles.