Rio Tinto Pockets $15 Billion Through Rights Issue

Posted by: Mark Scott on July 02

So that’s it. After an on-again, off-again relationship with rival BHP Billiton, and an unsuccessful link-up with state-owned Aluminum Corporation of China, or Chinalco — a major customer — London-listed mining giant Rio Tinto finally has got the money it so desperately needs. On July 1, the company announced almost 97% of shareholders had participated in a $15.2 billion rights issue. Details of a parallel Australian rights issue (Rio is dual listed in Britain and Australia) will be unveiled on July 3.

Rio’s capital raising has been a long-time coming. Ever since the miner forked out $38 billion for Canadian mining firm Alcan back in 2007, the company has been saddled with mounting debt. Rio has two trances of debt — almost $20 billion combined — that are due by October 2009 and 2010, respectively. That’s why Chief Executive Tom Albanese courted Chinalco, and why eventually he ditched the Chinese in favor of a shareholder rights issue and a lucrative joint venture with BHP Billiton.

The fact investors were willing to hand over more cash to Rio just shows how much confidence has returned since early 2009. When the Rio-Chinalco tie-up was first announced, analysts said it was the most viable way for the miner to raise much-needed capital in a short period of time. Since then, global financial markets have somewhat rebounded, and Rio’s shareholders balked at being left out of Chinalco deal.

For sure, we haven’t returned to the credit-soaked mining mergers of two to three years ago, when the likes of BHP Billiton was (unsuccessfully) offering $160 billion for rival Rio Tinto. But that doesn’t mean deals have vanished altogether. The recent offer from Xstrata, the Swiss-based miner, to merge with Anglo American could be a sign of things to come. In response, Anglo is reportedly shopping its Brazilian operations to raise a war chest to see off Xstrata’s advances.

Does that mean the commodities industry has survived the worst of the recession? Maybe not just yet. But if shareholders are willing to spend almost $15 billion in Rio’s rights issue, the investment case for the mining sector could well pick up in the second half of the year.