Jeremy Warner: Rio Tinto ditches its Chinese connection

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Outlook Now do keep up. A year is a long time in politics, to misquote Harold Wilson's famous remark, but it seems to be a positive aeon in the mining industry. Fast back 12 months and the commodities sector was still booming, with prices at record highs and Rio Tinto confident in its rejection of a generously valued bid from BHP Billiton.

Then came a slump of unprecedented proportions and not only did Rio's rejection look misjudged, but with $40bn of debt hanging around its neck, the consequence of its own top-of-the-market acquisition spree, the company was plainly in some financial difficulty.

Step forward the Chinese state with a deal that offered $19.5bn of cash in return for stakes in some of Rio's choicest assets and an enhanced shareholding in the company as a whole. At the time, with limited appetite for the size of rights issue that would have provided an alternative solution, this seemed to Rio the least worst option, and besides, it offered the chance to expand the company's business opportunities in China.

Yet to many shareholders, still bruised in having their pre-emption rights ignored by Barclays, it looked a rotten deal, and it was never likely that Australia, where the key iron ore deposits are located, would approve of this marriage of supplier and customer in any case.

As time went on, the deal looked worse and worse. Commodity prices have rebounded sharply, and the substantial premium that Chinalco was to have bought in at fast turned into a discount.

By attempting to renegotiate on terms that were bound to be unacceptable to the Chinese, Jan du Plessis, Rio's chairman, has at least saved the Australian government the political embarrassment of having to reject the deal, but at the same time he must have made his name dog meat in China. The "pioneering strategic partnership" Rio planned with China lies in tatters. The Chinese will not quickly forget Rio's betrayal.

As for the Rio's debt mountain, there is now to be the rights issue investors were so reluctant to back in the depths of the bust, and Marius Kloppers, chief executive of BHP Billiton, gets to have a watered-down version of his merger in the form of a joint operational agreement for the two companies' iron ore assets in Australia. As I say, a year is a long time in this industry.