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Chinese-Alcoa consortium Forces BHP to pay more for Rio Tinto

Companies / Metals & Mining Feb 08, 2008 - 04:00 AM GMT

By: Fat_Prophets


Best Financial Markets Analysis ArticleBHP Billiton has upped the ante with respect to its takeover ambitions for Rio Tinto, boosting its previous 3-for-1 share offer to a more reasonable 3.4-for-1. To what extent this increase was influenced by the arrival of the Chinese onto the RIO register remains a mystery, but it must have entered BHP's calculations to some degree. We believe RIO remains in a position of strength with regard to developments and that shareholders should sit tight.

"RIO remains firmly in the driver's seat with respect to the unfolding takeover scenario."

Fat Prophets initially recommended buying RIO at $73.99 in July 2006 (Fat Mining 35). Our last review of the stock was during January in Fat Mining 109.

In the near-term, Rio Tinto remains highly influenced by the takeover bid from BHP Billiton and the acquisition of a 12% stake by Chinalco, in association with Alcoa. Since touching a corrective low of $99.52 in January, the stock has risen by as much as 34% to reach $133.39 earlier this week.

Following such a rapid rebound in prices, we cannot rule out a near-term pause for consolidation. However, with investor support for the stock remaining buoyant, we believe that downside risks are limited. As marked on the daily chart, initial support lies between $115 and $110 with the January low of $99.52 underpinning the broader upward trend.

Although the potential for continued volatility in the weeks ahead remains high, the dominant feature of longer-term charts remains the underlying upward trend. In coming months, we believe that Rio retains the potential to break above the November high of $149.99, extending to new alltime highs.

As we outlined in our BHP report, a fresh offer has been tabled for Rio Tinto, as the company does everything it can to increase the level of market support for its ambitious plan to snare RIO, and in the process create the world's biggest mining group.

BHP's bid now stands at 3.4 of its shares for each RIO share held, an improvement on the previous 3-for-1 offer that RIO shareholders, the market and the RIO board had flatly rejected.

This effectively values RIO shares at A$156.74 per share, which is a premium to their closing price of $127.35 a share on Tuesday, prior to the announcement of the revised bid. This of course will change with the pullback in BHP's share price on the market on Wednesday.

Whether this latest bid will be enough to secure RIO remains to be seen. It will depend on the reaction of the RIO board, the market and also the Chinese-Alcoa alliance, which dealt themselves into the equation with their lightning raid on RIO on Friday night in London.

This consortium, comprising Aluminium Corp of China (Chalco) (backed by the Chinese government) and Alcoa of the US, has acquired a 9% stake in RIO, giving it a major say in what happens next.

BHP's revised 3.4-for-1 share offer represents a 45% premium to Rio's pre-bid price in November last year and that the portions that each company would hold in a merged group would be BHP 56% and RIO 44%. The portions that each company would hold in a merged group would be BHP 56% and RIO 44%.

We still maintain our long-held view that an offer of at least 4-for-1 represents appropriate value for RIO shareholders.

RIO's board and the Chinese-Alcoa consortium have not yet made any official comment with respect to the bid, although we would expect these over the coming days. At the moment, the RIO board has recommended that its shareholders take no action.

What role may the Chinese play in all of this? Well, we are confident that they have no plans to bid for Rio Tinto. But they have the potential to throw a potentially big spanner in the works with respect to BHP's takeover plans. The Chinese have made it abundantly clear that they oppose any potential tie-up between BHP and RIO, and this is one way of putting the cat amongst the pigeons.

It could be argued that the eleventh hour arrival of the Chinese could have helped force BHP into a higher bid, and may still present problems for BHP down the track. Remember, as recently as just a few weeks ago BHP was arguing that its previous 3-for-1 share offer represented compelling value. But the market disagreed.

The net effect of what the Chinese-Alcoa consortium has done is to effectively force BHP to pay more for RIO (closer to our original 4-for-1 share estimate) than BHP's existing 3-for-1 share deal.

Interestingly also, Chinalco and Alcoa have reserved their right to increase their stake, but only if BHP makes a formal bid or cuts a deal with Rio, which it has now done. So the potential is there for the Chinese to potentially raise the stakes by upping its stake in RIO. This battle is a long way from over in our view.

We reiterate that it is clear to us that the Chinese are not interested in gaining control of RIO. This would be met with stringent opposition by the Australian federal government on national interest grounds, as the Chinese would be fully aware. The Australian government would seek to preserve resources of substantial national economic interest, principally the Pilbara iron ore assets in Western Australia.

In the worst case scenario for the Chinese, which would be a BHP-RIO tie-up, they and Alcoa have probably grabbed an important seat at the table in order to get a share of the merged group's aluminium/alumina assets.

Remember, one of the jewels in RIO's crown is the Alcan aluminium business, which it successfully acquired late last year, beating Alcoa in a takeover battle. Both Chinalco and Alcoa would be keen to share the spoils in any asset sell-off. The decision to strengthen its links with Chinalco was the simplest option for Alcoa after the failure of the Alcan bid.

We reiterate our view that Rio Tinto remains in a position of strength as far as the whole saga is concerned and recent developments simply underline this. We would advise Members holding Rio Tinto to take no action and await further developments as they unfold.

Accordingly, Rio Tinto will remain firmly held within the Fat Prophets Mining & Resources portfolio.

Disclosure: Interests associated with Fat Prophets declare an interest in Rio Tinto

For a FREE sample of Fat Prophets research please call 02079369357 or email

About Us - Fat Prophets provides independent advice on the financial markets where our objective is to be transparent, accountable, objective and ethical. We believe that integrity is the central characteristic of every successful investor. Our independence in financial markets is derived from the fact that Fat Prophets does not execute transactions or provide investment banking services.

Fat Prophets principal focus is to deliver a quality service to Members by discovering and identifying quality stock recommendations on the London Stock Exchange. The launch of our UK service follows the successful establishment of Fat Prophets in Australasia.

Founded in June 2000, Fat Prophets is owned and operated by financial markets professionals. Having become Australia's leading independent stock market advisors, our horizons were broadened during 2003 through the addition of Fat Prophets United Kingdom. Our service offering also includes Fat Prophets Mining & Resources, Fat Prophets USA, and Fat Prophets Funds Management.

Fat Prophets UK was launched in 2003. As one of the world's largest stock markets, the UK offers an expansive array of investment opportunities. Within this environment our value-based strategy has proven highly successful, and fattened our Members' portfolios.

Fat Prophets Australasia focuses on delivering a quality service to Members by identifying and recommending undervalued companies on the Australian and New Zealand stock exchanges.

Fat Prophets Mining & Resources coverage extends to companies involved in mining, exploration, precious metals, diversified resources, energy, mineral sands, bulk ores, diamonds, as well as mining and energy infrastructure services.

Fat Prophets USA has an international focus, recommending a broad range of US based and foreign companies trading on the US exchanges.

Fat Prophets Funds Management In 2005 the company diversified into funds management when the Fat Prophets Australia Share Fund (Fat Fund) was successfully listed on the Australian Stock Exchange after $33 million was raised.

Disclaimer : Mint Financial (UK) Ltd, trading as Fat Prophets United Kingdom, has made every effort to ensure the reliability of the views and recommendations expressed in this report. Fat Prophets United Kingdom research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication. However, like the markets, we are not perfect.
This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for all subscribers.
To the extent permitted by law, Fat Prophets United Kingdom and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Fat Prophets United Kingdom hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.

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