KEY POINTS:
Rio Tinto is confident its landmark US$19.5 billion ($37.2 billion) alliance with China's Chinalco will clear all hurdles, amid a mixed response to the deal from investors.
"We don't like this deal and don't think it is the best option," was a blunt assessment from analysts at Goldman Sachs JBWere.
Chinalco's investment will deliver the company stakes in a suite of iron ore, copper and aluminium assets and could lift its interest in the dual-listed Rio Tinto from 9 to 18 per cent.
Rio Tinto will use the capital injection to help tackle the US$38 billion mountain of debt it incurred buying Canadian aluminium producer Alcan in 2007.
"Even with cash injection of US$19.5 billion, Rio is still in a weak position in terms of its balance sheet and would be unable to easily participate in expansions, acquisitions or increased dividend payments for some time," GSJBWere analysts led by Neil Goodwill said in a note to clients.
However, Rio Tinto argues that the deal, which requires approval from shareholders, Governments and other regulators, provides far superior value to shareholders than any other option considered by the board.
Chief executive Tom Albanese is selling the deal directly to policymakers in the form of job savings and the continued investment in key Australian projects.
The cash injection would allow Rio to continue expansions of projects and "preserve approximately 2000 Australian jobs" at a time when resource companies are trimming their workforces due to the economic crisis. Pengana Capital fund manager Ric Ronge, whose investment firm holds BHP Billiton and Rio Tinto shares, said the transaction provided strategic benefits to the global miner and was unlikely to run into any road blocks with regulators.
"We don't really think there are any national interest issues, [or] any FIRB [Foreign Investment Review Board] issues - the ACCC [Australian Competition and Consumer Commission] was very happy to let BHP swallow Rio," Ronge said.
BHP Billiton dropped a hostile takeover bid for Rio in November amid market volatility and concerns about its rival's debt.
"The strategic benefits are also quite good for Rio because it draws them closer to the world's largest customer of raw materials and provides a key exposure to a very large balance sheet," Ronge added.
China's state-backed aluminium group has agreed to pay US$12.3 billion for a number of Rio Tinto's iron ore, aluminium, bauxite and copper assets, and provide US$7.2 billion for convertible bonds.
Rio Tinto unanimously recommended the transaction, which will allow Chinalco to appoint two new non-executive board members.
"We are very confident that what we have put together is something that will stand not only the test of the ... board and treasurer, but also the strong test of time," Rio's managing director strategy Doug Ritchie said.
"This transaction is a clear winner, it doesn't cede management control, it doesn't cede any long-term issues."
- AAP
