Chinalco deal no longer a must as BHP goes to Rio

RIO Tinto has been queried by the Australian Stock Exchange on this week's share price slide, but its reply may be short and not to the point. Its shares are falling because investors have woken up to the fact its $US19.5 billion ($A26 billion) Chinalco deal has gone from being a necessity to an option.

A new deal with BHP Billiton is another. There has been cautious engagement, and BHP boss Marius Kloppers and Rio chief Tom Albanese touched base when at the Bank of America/Merrill Lynch mining conference in Barcelona this week. Rio cannot solicit offers under the terms of its deal with Chinalco, but the duo presumably discussed matters of common interest.

A new share issue is also in the mix, as a stand alone or as a supplement to a revised Chinalco deal, or one with BHP.

The share price action certainly deserved the query: Rio shares hit $71.60 last Friday, and have fallen by $14, or 19.6 per cent, since, including a $7.65, 11.7 per cent plunge yesterday on reports that it will launch a $10 billion share issue after scrapping, or heavily modifying, the Chinalco deal ¡ª a deal it has consistently championed.

But an informative response is only likely if Albanese and his team of executives and advisers have sifted through the options. The winnowing process is believed to be incomplete, although there are subterranean signs of heightened activity.

There is no doubt the original $US19.5 million deal, which would have seen Chinalco double its stake in Rio and take minority joint-venture interests in key assets including Rio's main Pilbara operations, no longer stacks up.

At the very least, it should be renegotiated to reflect the fact Rio's share price has leapt from a low of $32 in December, ahead of February's Chinalco announcement, to last Friday's $71.60 high. Even after this week's descent, Rio's shares are still 8 per cent above the strike price of convertible bonds that Chinalco would receive under the original terms of its deal.

Easier credit markets and heightened asset sale interest are other factors that demand a rewrite in Rio's favour, and the extent of Chinalco's head company and joint venture buy-in must also be modified if the deal is to pass muster on foreign investment grounds in Canberra.

A general share issue or convertible bond issue of about $10 billion would lower the foreign investment hurdle, by diluting Chinalco's eventual stake from 18 per cent to below Australia's primary 15 per cent foreign investment hurdle, and would respond to institutional anger about the original decision to bypass them in favour of Chinalco.

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