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February 16, 2009
Rio Tinto is on the ropes due to the credit crisis and its rejection of merger talks with BHP Billiton. It is heavily indebted ($US38 billion in debt,) due to its acquisition of Canadian aluminum giant Alcan in 2007. With the global recession Rio Tinto is slashing jobs, written down US$8.4 million of losses, is selling assets to raise the cash to pay off the debt and getting into bed with the Chinese-- Chinalco, the state owned aluminum group ---to avoid sailing alone in the sea of debt with the birds of prey circling overhead.
Chinalco's $US 12.3 billion minority equity in Rio Tinto which will allow the Chinese aluminum company to increase its stake in Rio to 18%. The stake is designed as an attempt by the Chinese steel mills to screw BHP, as it would to allow Australia's largest iron ore customer into the citadel of the Pilbara with the stated intention of breaking the Rio Tinto/BHP duopoly. When the mining boom comes Rio Tinto Australian iron ore expansion plan will get Chinese support over the BHP Billiton one and Rio Tinto will emerge as the dominant world player in iron ore and BHP Billiton is in danger of becoming a poor second.
I have little sympathy for Rio Tinto's fate. This is the mob that talked in terms of the eternal boom, has consistently downplayed the very rapid fall in commodity prices in the second half of 2009, thinks global warning is a fiction, and, as part of the Minerals Council of Australia, is deeply and stridently opposed to the cap and trade approach to reduce greenhouse gases. It sees Australia's future primarily as a quarry not as an information society.
This is a company whose record is one strategic blunders.
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A question: is China trying to wrest control of iron ore away from BHP and Australia with Chinalco's stake in Rio Tinto?