MediaToday
Mark Lamb | Wednesday, 10 June 2009

Scrap heap challenge

Weekly international investment round up to 9 June 2009

• Mining giant Rio Tinto scraps deal with the Chinese

• Commodities prices experience a mini-boom

Along with love it would appear there is something else money can’t buy. China’s mega billion dollar deal to buy a large chunk of one of the world’s largest mining companies has been scrapped with Rio Tinto preferring to raise $21 billion dollars from a share sale and joint venture with one of their biggest rivals instead.
Those holding Rio shares immediately saw their value jump by over 10 per cent while BHP Billiton, it’s declared partner in the new venture, added almost 9 per cent in Sydney trading.
This will come as a huge blow to China’s ambition of gaining more control of the worlds raw materials market as it attempts to continue its amazing growth cycle by stimulating domestic demand and employment by concentrating on internal infrastructure projects as international export markets have somewhat cooled.
Rio’s decision is intriguing for different reasons. Australia’s Mandarin-speaking Prime Minister, Kevin Rudd, would have been placed between a rock and a hard place if the deal with state-owned Chinalco had gone ahead as it would ultimately have needed his government’s approval. Opposition mounted as it would have given the Chinese an 18 per cent stake in Rio and control of some Australia’s biggest copper and iron ore mines. Then, had he said no to the deal, one of his country’s most important trading partners would not have been best pleased leading to possible bad feeling and unpleasant economic consequences. Clearly, Mr Rudd is now a relieved man.
It was only last year that Rio fought off the merger advances from BHP with whom they are now snuggling up with leading many to ask, ‘will these two giants marry some time shortly after 25 November?’ This date is important as under stock market rules BHP cannot launch another bid until after then. This speculation is great news for Rio’s current shareholders who under the terms of the new deal may purchase 21 new shares for every 40 they own at a price of 1,400 pence per share representing a 49 per cent discount based upon last Thursday’s share price. Free money anyone?
Falling demand for natural resources up to the beginning of this year together with the huge on-going financing costs incurred following the purchase of aluminium producer Alcan for $38 billion at the height of the market in 2007 led Rio Tinto having to do something, so in February it turned to the cash rich Chinese for a deal. Since then however natural resource demand has enjoyed a mini-boom making the $19.5 billion dollar deal look cheap. In fact, since Rio and Chinalco announced their original deal the Bloomberg Europe Metals and Mining index has jumped up by over 45 per cent whilst the London Metal Exchange index has increased by 35 per cent. Rio will now have to pay the Chinese company $195 million dollars in compensation for scrapping their deal.
Rio and BHP will now create a new joint venture, with BHP paying Rio nearly $6 billion dollars privilege.
As economic conditions become brighter and future inflationary fears creep in commodities will no doubt emerge stronger still from the post credit crunch scrap heap.

Mark Lamb is Head of the Life Dept. at Citadel Insurance plc which is authorised to carry on general and long term business of insurance under the Insurance Business Act, 1998 and is regulated by the MFSA. Contact by email; mlamb@citadelplc.com Tel; 25579000. Website; www.citadelplc.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek financial advice before making any investment decision.

 

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Scrap heap challenge

 

 

 

 


10 June 2009
ISSUE NO. 586

Malta Today

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