Rio Tinto Walks Away From Chinalco; Launches A Rights Offering

Rio Tinto (RTP: 193.76 +11.08 +6.07%) decided to walk away from a $19.5 billion deal with Chinalco originally announced in the middle of February, in which the Chinese company could have controlled up to 19% of Rio Tinto PLC and 14.9% of Rio Tinto Limited, and could have benefited from the proposed copper, iron ore and aluminum joint ventures.

Rather than this tie-up, Rio Tinto will seek to raise $15.2 billion through a rights offering and will pursue an iron-ore joint venture (JV) with BHP Billiton (BHP: 60.29 +3.25 +5.70%). This equity infusion will go a long way to paying down a portion of its hefty debt load largely assumed from the prior acquisition of Alcan — without having to sell stakes in some of its better mines at what appears to have been a less than favorable point in the commodity cycle.

In fact, the company says it intends to use the net proceeds to pay off of a tranche of the Alcan credit facilities due in October 2009 and the substantial prepayment of the tranche due in October 2010. Even better, the company says net debt will be reduced to approximately US$23.2 billion — easily surpassing the prior $10 billion net reduction target set for year-end 2009.

As for the terms of the rights offering, Rio Tinto will sell the new shares at a large discount to existing shareholders. The company said it will offer 21 new Rio Tinto PLC shares for 40 existing shares at a price of 1,400 pence per share, which is a 48.5% discount to the closing price on June 4, 2009. Also, RTP will offer 21 new Rio Tinto Limited shares for every 40 existing shares at A$28.29 per share, which is an approximate 57.7% discount to the closing price on June 4, 2009.

Rio Tinto announces iron ore joint venture with BHP Billiton

Also, Rio Tinto and BHP Billiton signed an agreement to form a joint venture [JV] covering both companies’ entire Western Australian iron ore assets. All the current and future Western Australian assets will be owned 50/50 by BHP and RTP. BHP will pay Rio Tinto $5.8 billion to take its equity interest in the JV up from 45% to 50%.

Both companies believe the JV will create production and developmental synergies exceeding $10 billion, which are expected to come from actions that include combining adjacent mines, and consolidating the management, procurement and overhead activities into a single operation.  The agreement excludes the Hlsmelt plant.

According to RTP, a $275.5 million break-up will be required if either party decides not to proceed with the transaction, fails to recommend the transaction to shareholders, or breaches the exclusivity provisions agreed upon. The companies expect the JV to be completed around the middle of 2010.