Major investors in Rio Tinto have firmly rejected company claims that shareholders are warming to the miner's proposed $19.5 billion tie-up with China's top aluminium maker Chinalco.
Chief Executive Tom Albanese said initial shareholder opposition to the deal, which involves selling Chinalco $12.3 billion in asset stakes and $7.2 billion in convertible notes, was on the wane.
In the past three weeks, in all the markets, there is a greater recognition about the value proposition and that a larger financial solution is better than a smaller financial solution, Albanese told the Australian Financial Review (AFR) in an interview published on Wednesday.
However, two top ten UK-based investors in Rio told Reuters that there were still fundamental concerns and one of them said they expected institutions to vote against the deal in its current form.
Albanese, based in London, is in Australia this week to woo shareholders and persuade Canberra to back the deal that could double the state-owned Chinese group's equity stake in Rio to 18 percent.
Shareholders initially protested at being left out of Rio's capital raising plans after the deal was announced last month. Those concerns have remained despite Albanese's comments.
We are not picking up any particular suggestion that people are happier with this deal than they were. The only aspect that they might be feeling a little more positive about is the price the Chinese are proposing to pay for the assets, said one top 10 UK shareholder.
But the overall structure of the deal, people are still deeply unhappy with because it doesn't respect pre-emption rights, the shareholder said.
Robert Talbut, chief investment officer of RLAM, ranked Rio's 25th largest shareholder, said: Our view is that a conventional deal is preferable to the one the board has put on the table. Currently, we will not be supporting the deal.
Rio has a dual listing structure in London and Sydney. About two thirds of the company's market capitalisation is in the UK.
Rio's London shares jumped 10.87 percent to 1,795 pence by 1521 GMT, compared with a 10 percent rise in the UK mining index, helped by a jump in copper prices.
TEAMING UP WITH BHP?
The deal was designed to help Rio cut half its $39 billion of debt ahead of a 2010 deadline and shore it up for a collapse in commodities prices, after bigger rival BHP Billiton scrapped a hostile takeover bid in November.
Like other miners, Rio is desperate to cut debt as refinancing is likely to be tough with banks tight on credit and as pricing on its key product, iron ore, could drop as much as 60 percent this year, due to shrinking demand from China.
In a separate interview with The Australian newspaper, Albanese said the main alternative to the Chinalco deal, a rights issue, could have raised $10 billion, but would have been at a 70 percent discount to its Australian shares and a 60 percent discount to its UK-listed shares.
Rio left the door open to a potential joint venture with BHP in iron ore in Western Australia, even with a Chinalco deal.
Specifically, the CEO mentioned that Rio is not fettered at either the corporate or asset level to consider a deal with BHP in this regard, Deutsche Bank analyst Peter O'Connor said in a research note following a briefing with Albanese on Tuesday.
A Rio spokeswoman confirmed on Wednesday that Albanese had made the comments to analysts.
Analysts at Merrill Lynch last week speculated that if the Chinalco deal fell through, Rio could consider selling 18 percent of its Hamersley Iron operation to BHP for $6.5 billion or form a joint venture to operate their iron ore assets.
An iron ore joint venture with BHP is more workable than a corporate solution, Albanese said, when asked about the joint venture scenario.
He meant that addressing European Union competition concerns would be easier in a joint venture than with a full corporate takeover, Rio spokeswoman Amanda Buckley said.
European regulators last year raised objections to BHP's proposed takeover of Rio mainly due to concern that combining the world's second- and third-largest iron ore producers would drive iron ore prices higher and limit choice for steel makers.
Even if Rio can convince reluctant shareholders to support the deal, it would still need approval from Australia's Foreign Investment Review Board.
Albanese is expected to lobby the Australian government for foreign investment approval for the deal while he is in the country, though he would not say whether he would meet Treasurer Wayne Swan.
Swan said on Monday the government would take its time before deciding on the Rio-Chinalco deal.
Chinalco's new president, Xiong Weiping, was also in Australia this week to lobby the government and reassure shareholders.
Rio Tinto expects 2009 to be a very rough year for key commodities in terms of price and volumes sold, the group's chief economist, Vivek Tulpule, said on Wednesday. (Additional reporting by Bruce Hextall and James Thornhill in Australia and Eric Onstad in London) (Editing by Dhara Ranasinghe, Jon Loades-Carter and Guy Dresser)
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