Rio Tinto’s advance on Riverdale Mining is more a confirmation that the iron ore giant had badly missed the other resources boom, coal, after being well placed a couple of years ago.
It sold down its US domestic thermal coal interests and hasn’t either had the capital or the management time to look at growing in this sector because of the battle to save the company after the horribly expensive $A44 billion Alcan buy at the top of the market in 2007.
Paying for that deal saw Rio sell its US coal interests and miss several important Australian coal assets that came onto the market.
Rio had to sell assets, cut debt and preserve cash and cashflows until it had rightsized its balance sheet, and avoided the clutches of Chinalco of China (with which it signed a ground breaking exploration agreement covering areas in China late last week).
Rio chose to grow its already huge iron ore business in the Pilbara, while also keeping cash up to copper interests, especially in Mongolia.
China’s rebound from the GFC drove iron ore and coal prices higher, enabling the former to recover and then surpass the levels achieved in 2008 when the GFC crunched the boom.
Coking coal prices have regained much of the ground they lost, but are still well below the $US300 a tonne level achieved in 2008 while thermal coal prices have also bounced back in a similar way.
But while the iron ore boom has been recouped by Rio and the sharp recovery in copper prices is offsetting lower production from some of its mines, the coal demand rebound has largely passed Rio by.
Its major operations in Australia are moderate by Australian scale in Queensland (Hail Creek) and Coal and Allied in NSW, but these rank behind the coal interests of global rivals, BHP Billion’s with Mitsubishi, mostly in Queensland and Xstrata’s operations in both Qld and NSW.
At the investor briefings in London a week ago last Friday and then in Sydney a week ago yesterday, Rio made it clear it was on the lookout for moderate sized purchases of a couple of billions of dollars.
Many in the market took that to mean that the company was casting its eye over smaller iron ore rivals in WA and most analysts missed coal.
So the news of the approach to Riversdale Mining (it came out of London where the place leaks like a sieve for major deals involving Rio and BHP) caught the market by surprise.
Yesterday Riversdale eventually confirmed the $3.5 billion approach.
"From time to time the Company enters into confidential, non-binding discussions with third parties concerning possible transactions at either the corporate level or the asset level.
"The Company has had discussions with Rio Tinto concerning a possible transaction at the corporate level for indicative consideration of $15.00 per Riversdale share. These discussions were undertaken in confidence and Rio Tinto advised the Company that it is not in a position to submit a proposal for the potential acquisition of the Company.
"While discussions with Rio Tinto are ongoing, there is no certainty that Rio Tinto or any other party will proceed with any proposal for the acquisition of Riversdale or, if it does, the timing of such a proposal or the terms and conditions on which any such proposal will be made."
Naturally the shares jumped, sharply, closing up more than 15% at $16.31, after hitting a high of $16.41.
Rio shares ended down 42c at $86.
This isn’t the end of this story.
Riversdale’s assets include the Benga project and neighbouring Zambezi project in Mozambique with high-quality coking coal used in steel-making.
It also owns an operating underground coal mine in South Africa, Zululand Anthracite Colliery (which is the hardest of call coals, but not much in demand in China, Japan or Korea).
To seal a deal, Rio Tinto will need to secure support from Riversdale’s major shareholders: Tata Steel, Brazilian steelmaker CSN and China’s Wuhan Iron & Steel Corp, plus a big American hedge fund.
