Rio investors to argue for rights issue

Shareholders of troubled miner Rio Tinto will argue they would have been better-served by a rights issue than the company’s preferred fund-raising plan to tackle its mammoth $40 bn of debt when they meet the world's second-largest miner’s management in coming weeks.

Rio last week announced the deal with China’s Chinalco to raise $19.5 bn, comprising $7.2bn in convertible bonds and $12.3bn in exchange for stakes in a range of Rio's assets. The bonds have a maturity of 60 years while yielding a coupon of about 9 per cent and, once converted, will raise Chinalco's stake in Rio from 9.3 per cent to 18 per cent. Rio has since undertaken a road-show to try selling the plan to investors.

But such has been the uproar among shareholders at Rio’s plan and the lack of pre-emption rights on the securities that chairman Paul Skinner, who had been set to quit in April and was lined up to take the chairman’s spot at BP, will now forego the oil giant and stay until the Summer to help chief executive Tom Albanese convince them to vote for the deal. The benefit of the plan is that it covers both the $8.9bn slice of Rio’s of debt due this year, and the $10bn due in 2010.

But a source familiar with the matter said that at least some of Rio’s shareholders will push management to abandon the agreement and push for a rights issue for about $10 bn to cover this year’s debt payment. This would give the company more time to find other ways to raise cash to cover next year’s debt instalment. Another alternative would be to open up the existing deal to Rio shareholders, but this would need the agreement of Chinalco.

A spokesman for the Association of British Insurers, which represents a substantial slug of Rio investors, said "Shareholders have made clear their preference for a pre-emptive issue."