KEY POINTS:
Paul Skinner's sunny office in the heart of the City of London is an oasis of calm. There is little to betray the fact that he is at the centre of one of the biggest takeover battles of all time or that he is a key player in
the fledgling relationships being forged between the West and communist China.
A 40-year veteran of oil major Royal Dutch Shell and now chairman of mining giant Rio Tinto, Skinner is fighting off a US$138 billion ($177 billion) merger approach from rival BHP Billiton - and he is hunkered down for a long battle. The proposal is likely to take months before it emerges from the tortuous process of seeking approval from a variety of regulators around the world.
In the meantime, he says: "Our chief executive, Tom Albanese, and his team have not been distracted; in fact they have been stimulated by it."
The rest of the corporate world has been battered by the credit crunch but Rio, he says, has been relatively immune.
"Our business is quite a long way from all that. It is very physical - all about getting the rocks in the box."
With a business heavily focused on China, Rio's growth is largely predicated on emerging Asian markets rather than the ailing United States. As Albanese told the markets last month, global demand for resources has not been affected by the slowdown in the States.
"China is an economy driven by investment and increasing domestic consumption," Skinner says. "It is less driven by foreign trade than people think."
He believes there is a commodities super-cycle which "is likely to be more extended than we have seen for some time. Our exploration portfolio is looking very positive. We believe it is a differentiator for us compared with BHP."
Ah, BHP. Skinner has rejected its offer of 3.4 shares for each one in Rio as too low and is refusing to enter talks.
If successful, it would be one of the biggest-ever takeovers and would create one of the top five companies on the planet. Wouldn't it make sense for the two to team up to create a bigger, more powerful company that would be in a stronger position to do business with the Chinese?
"That is a very interesting question," he says.
"I could give you a number of examples of companies that have grown to be very large and have found it more of a challenge than they thought. We all need a little humility about operating very large businesses.
"You have to be sure you have the managerial capacity to deliver. In this case, you also have to think carefully about the outcomes of the regulatory process, which is likely to start fairly soon. When your course is set as fair as ours, you need a very significant economic incentive to depart from it. The emotional bias of the board is certainly not 'independence at all costs'; it is guarding the shareholder interests."
Other large mining groups, including Vale and Xstrata, have been in takeover talks, and Skinner reckons there will be more consolidation in the industry.
"There isn't a great imperative for us, though. We are confident we can sustain a growth rate of around 9 per cent per annum over the next 10 years, and I doubt there are many companies in the industry that can do that. In the case of BHP, it is clear to us why this combination is attractive to them to secure their future growth. They need us much more than we need them."
One intriguing aspect of the battle is the involvement of Chinese aluminium company Chinalco, which teamed up with Alcoa of the US to take a 9 per cent stake in Rio, giving it a strong position to influence the outcome.
The Chinese, who are concerned that a merged BHP/Rio would have too much power over the pricing of key commodities, are also rumoured to be planning to take a stake in BHP, although Skinner disclaims any knowledge of that.
Does he think the Chinese want to thwart a merger?
"What they have said suggests they would be happy as a long-term investor in Rio. As to any specific intent they may have of frustrating the bid, that is not something they have talked about with us."
They have not, he says, sought a seat on Rio's board.
"At this stage, I'll be honest, it is early - it is not something we would particularly welcome until it was clear how the relationship was developing."
He does, however, see the possibility for joint ventures, particularly in aluminium, where Rio is a major player after its US$38 billion takeover of Alcan last year.
"If we get into that mode, there won't be a shareholder discount," he says with a smile.
He concedes that, despite runaway growth in Asia, a serious recession in the US would still hurt.
"We borrowed all the money to finance the Alcan deal, fortuitously just before the credit crisis broke. I bet a lot of the banks that lent it to us would still like to have it," he laughs.
"Alcan has reshaped Rio. We are now world leaders in aluminium, iron ore and copper. We have re-focused our portfolio on a number of commodities which are particularly leveraged to China."
On acquisitions and disposals he says: "I don't see any significant M&A in the short term, although we continue to maintain active files on assets we'd like to own. When conditions change, we will be there."
A US$10 billion programme of disposals is, he says, going well, even though buyers have been hit by the crunch.
"We are comfortable that we will deliver the disposals we planned for this year."
As befits someone whose youthful ambition - richly fulfilled - was to "live and work in as many countries as I could", Skinner believes the UK needs to get to grips with with the challenges of globalisation: "We must take an approach of openness and engagement and debate."
Doing business with China, however, opens up difficult issues regarding the environment and human rights. China is already under fire over Tibet and for resisting international pressure to take a more critical stance towards Sudan over war-torn Darfur.
Some observers fear Western businesses and governments will be bewitched by the commercial opportunities of a vast new market and put profit before principles.
Skinner, who also sits on the board of international bank Standard Chartered, another business with strong links to China, believes commerce can play a positive role.
"Open trade and investment relationships help greatly in the process of connecting economies and people and creating platforms for better understanding. Companies need to have a clearly articulated expression of their own values for sustainable development across social and economic areas. Human rights will be one feature of that.
"If we found ourselves, hypothetically, in a country where we could not sustain an operation that was compliant with our principles, we would leave, no question about that, even if that were damaging to our commercial interests."
Does he think it is feasible to try to hold Chinese and other overseas investors to Western standards of governance?
"If we develop a joint activity, we would use that opportunity to make it clear that there was an understanding about our principles. But I think there is the potential for quite a lot of misapprehension. My own experience is that Chinese businesses hit very high standards of operational performance, which align very well with the standards we have."
PAUL SKINNER
Rio Tinto chairman
Born: December 1944.
Education: Cambridge (degree in law).
Career: 1963-2003, Royal Dutch Shell.
2003-present, chairman, Rio Tinto. Non-executive director at Standard Chartered, Tetra Laval, Air Liquide.
Family: Married to Rita, two sons.
Hobbies: Opera, skiing, fly-fishing.
- OBSERVER
