Rio gets Mozambique riches with an Indian twist Matthew Stevens From: The Australian December 24, 2010 12:00AM SizePrintEmail Share RIO Tinto may have stamped its very hefty global footprint all over Riversdale Mining and given itself a healthy first-mover advantage. But investors continued to lay bets yesterday that there could yet be an Indian twist to this remarkable success story.
Confidence that Rio would face competitive action in the race for the Sydney junior that somehow ended up owning two coal monsters in Mozambique was fuelled yesterday by news that Tata Steel had failed to support the Riversdale board's recommendation of the Anglo-Australian's widely anticipated $3.9 billion offer.
Tata owns 24 per cent of Riversdale as well as a direct 35 per cent stake in the first of its Mozambique projects, a coalmine called Benga, and an entitlement to 40 per cent of its future output.
As part-owner and financier of Riversdale's ambitions, Tata also has a seat on its board.
The Indian steel conglomerate's representative here is N.K. Misra. According to Riversdale's website, Misra is Tata Steel's vice-president and mergers and acquisitions group head, and it emerged yesterday that he abstained from the vote in which the rest of the six-strong Riversdale board accepted Rio's offer on their own behalf and recommended the deal to their shareholders.
As part of the deal, Rio now has a call over the 2.4 per cent of Riversdale controlled by those five accepting shareholders, who include the father of this remarkable success story, executive chairman Michael O'Keefe.
As things stand, Rio has collected calls over 14.9 per cent of the company, with the balance coming from institutional owners, and the directors are committed to selling a further 1.1 per cent of the business should the takeover trigger the exercise of their collective options.
But all that means only that, so far, Rio hasn't generated any positive action from Riversdale's three major shareholders.
It is said that when Rio was outed as a bidder back on December 6, the mining giant was discussing its options with Riversdale's big three international stakeholders -- Tata, Companhia Siderurgica Nacional of Brazil, and Passport Capital of San Francisco. All told, they speak for 56 per cent of Riversdale, though Tata would seem to be the most embedded of them.
The Brazilian steelmaker Companhia Siderurgica Nacional owns 16 per cent and is believed to be a strategic owner but is regarded as a seller should it be able to secure a call over an off-take agreement.
Passport, which also speaks for 16 per cent, is a funds manager and is understood to be a seller. However, given its conditioning in US capital markets, it would seem likely to be a bit disappointed with Rio's pricing.
On the back of confirmation of Rio intent, which flagged a price circa $15, Passport's people were apparently out and about talking about a target price closer to $20.
Patently, given the still complicated tectonics of this transaction, it would very much serve Tata's interests to leave its position very, very much unclarified. But that doesn't necessarily mean its aim here is to take on Rio in a bidding war.
Indeed, the introduction of Rio as the operator of the Mozambique coal twins would probably prove extremely beneficial to its Benga JV.
The point there is that while Rio would seem unlikely to bring forward the timelines for Riversdale's Mozambique adventures (Benga first production by next September, Zambezi by 2014), it might well look to redrafting the targeted output of both -- just as it is likely to throw its experience and capital behind more speedily tackling the logistical problems.
But acceptance of Rio's terms might well need to come with the same sort of upside that the Brazilians will probably seek, which is a firm grip on the output of Riversdale's second project, the far bigger Zambeze mine.
There has, mind you, been an awful lot of noise from India over the three weeks since Rio was outed as a potential future owner of Riversdale and its coal twins.
It has been widely reported, for example, that a consortium of five state-owned Indian companies had formed a consortium called ICVL with the intention of investigating a bid for the junior.
India's engagement with the global coal business is a relatively new phenomenon. It's built on a growing appreciation that its domestic resources will not sustain its future demand and one that looms as reshaping the seaborne coal trade, as was China's loss of self-sufficiency in iron ore earlier this century.
But India is not the only home of potential bidding tension here. The other global majors will have been running their own rulers over Riversdale and probably for just as long as Rio, which has been keeping a close watch on the company since April.
It is said that Rio put the pedal to the metal on Riversdale after BHP Billiton was mooted as a potential suitor last month.
More recently, it has been speculated fiercely that Anglo American's stated ambition to double the size of its coking coal business within a decade means it could and should be a player in this game.
History would say that Rio's bid would end BHP's interest, if it were real.
For all that this would introduce Rio as a meaningful competitor in the coking coal business -- currently dominated by BHP as the senior owner of the richest assets in the Bowen Basin -- the fact is that the two Australian-born giants of global minerals rarely go head to head in the race for assets.
And Anglo, given the clear quality of Riversdale's chunks of the lower Zambezi Basin and the potential for further discoveries across the breadth of tenements it has collected, would surely be tempted.
At the same time, there are those who suggest Anglo might not exactly be the flavour of this decade or any other in Mozambique or anywhere else in southern Africa for that matter.
The issue any prospective counter-bidders now face, of course, is not only that Rio has offered a price fair enough to win the support of the board, most of whom have travelled the whole rich journey with Riversdale, it has also locked the target into a binding and all-encompassing set of conditions that guarantee it a last say in the matter.
The bid implementation agreement, which is underpinned by a $37.8m break fee, provides Rio with the opportunity to win Riversdale by matching any other offer. But there is more. Before Riversdale can accept another offer, it must explain to Rio why any counter-bid it makes has failed to win board support and the board must work with Rio in pursuit of a counter-offer that would work for all parties.
Clearly Rio wants to make it clear that anyone else who might consider Riversdale as a target will want to have deep pockets and courage enough for a contest.
RIV Price at posting:
$16.57 Sentiment: ST Buy Disclosure: Held
