In a move designed to increase the pressure on the suitor BHP Billiton, Rio Tinto unveiled a plan yesterday to sell almost a third of its increased iron ore production next year on the spot market to cash in on record prices.
Analysts said the decision to sell up to 15m tonnes of iron ore on the spot market, where it is attracting more than twice the $85 (42) per ton average contract price, could give a fillip to Rio's turnover. Tobias Woerner, an analyst at MF Global Securities, pointed out that the Chinese spot iron ore price "currently points to around $205 per ton ... you can see what this price move would do to the division's value." Indeed, assuming that the company pocketed an extra $100 per ton beyond the average contract price, it would mean another $1.5bn in revenue.
The announcement was the latest in a flurry from Rio as it kicks its lobbying campaign to fight off BHP Billiton's proposed 67bn takeover offer into high gear. The day before, Rio announced that it had decided to invest a further $1.1bn in expanding the Kestrel coal mine in Australia, as well as the Eagle copper and nickel mine in America.
Its chief executive, Tom Albanese, has called BHP's approach "dead in the water" and has asked the Takeover Panel to impose a deadline. The companies expect the regulator to respond this week. Central to Mr Albanese's argument is that Rio is better off on its own and that it has strong growth prospects as an independent group hence the trumpeting of what might otherwise be considered relatively pedestrian internal decisions.
Few analysts argue against the logic of merging the two companies to create what would be the world's first "super-major" mining group that would be better able to respond to and capitalise on global demand for commodities. Yet most also agree that BHP will have to pay more to win the day. Royal London Asset Management, an investor in both companies, has said that BHP will have to add a cash sweetener of up to $15bn to the all-share offer.
The head of BHP, Marius Kloppers, has tried to re-centre the debate on the relative value of the two groups to argue that his proposed three-for-one share swap is equitable given what he argues is BHP's better track record of managing assets and generating shareholder returns.
The market remains unconvinced, with Rio's shares trading at about 10 per cent above the offer price.Reuse content