The incoming chairman of Rio Tinto, Jan du Plessis, has two important tasks in my view: to renegotiate the deal with Chinalco and to bring about change within Rio itself.
Chinalco sees the deal as an indivisible package — bonds that are convertible into 18 per cent of the equity, a series of specific asset stakes, side deals on marketing – and is resisting any change to each part.
But while each bit of the deal on its own looks okay, the whole looks underpriced. London shareholders are unhappy about the dilution from the bonds; Australian shareholders seems to be more worried about control.
Just as Alcan was purchased at the top of the market, the subsequent deal with Chinalco to finance it was done in desperation at the absolute bottom. Lucky Chinalco.
But if the Rio management can’t renegotiate the terms of the deal after a 40-50 per cent rally in metal prices and a 30 per cent rally in global stocks (albeit one that may now be correcting), with shareholders in revolt, with BHP circling and the Australian government preparing to demand concessions, they should resign.
The soft spot seems to be the bond issue to Chinalco: the coupon is too high (9 per cent) and the conversion too rich (to 18 per cent). Chinalco seems to be hinting at a willingness to shift on this. What it really wants is the stakes in the assets, especially 15 per cent stakes in Hamersley Iron and Escondida, and to become virtually an equal partner in iron ore marketing, but those are the parts that should be changed.
The unhappiness at yesterday’s shareholder meeting in Sydney was palpable, but that’s not why du Plessis should force some change at Rio.
The vote against Sir Rod Eddington (63 per cent in Sydney and 33 per cent overall) was swelled by a protest about his irrelevant (to Rio) role at Allco, stirred up by proxy adviser RiskMetrics, so the protest against Rio’s management and board can probably be taken as an average of the other three director re-elections — or 13.3 per cent.
That is uncomfortable, but not enough, on its own, for blood in the streets.
But Rio is an arrogant company that has made mistakes. The Wall Street and London bankers who swaggeringly led their companies, and the world, into disaster have all gone, and while Rio’s predicament is nothing like that of, say, Royal Bank of Scotland or Citigroup, buying Alcan when they did and rejecting BHP was a sackable offence.