Rio Tinto's Chief Disappointed, Defensive

飞雪寒冰

Rio Tinto is a mining powerhouse that wields clout in many of the world's most important resource markets. But the company's reputation is being rocked in China by criticism over its decision to scrap a proposed deal with steelmaker Chinalco in favor of a massive rights issue and joint venture with BHP Billiton, the world's largest mining company.

Chinalco's proposed US$ 19.5 billion capital injection would have doubled the Chinese state-owned company's stake in Rio Tinto to 18 percent. It would have been China's largest investment yet in a western company.

In February, when Chinalco made its offer, commodities market prospects looked grim. It seemed Rio Tinto, already saddled with US$ 38 billion in debt, would have little chance finding ready cash to survive serious financial pressure. Most of its debt accumulated after an untimely purchase of the Canadian aluminum maker Alcan in 2007, at the market's height.

International debate over the Chinalco proposal ensued, leading to delays as regulators and shareholders pored over plans. In Australia, vocal opponents questioned Chinalco's motives and ties to the Chinese government. These critics were met with complaints of nationalism and protectionism from the Chinese side.

A few months later, as the global economy started perking up, Rio Tinto's leaders began eyeing alternatives to Chinalco's capital plan. The bomb dropped June 5, when the company announced after a meeting of shareholders that it was withdrawing from the Chinese deal in favor of a US$ 15.2 billion rights issue as well as a 50-50 iron ore joint venture with BHP Billiton, a key rival.

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Caijing: How do you view China's emergence as a buyer of natural resources, especially put in the global perspective?

Albanese: Well, I've been quite publicly, and we've been quite publicly in support of Chinalco and also Chinese overseas investment in the resource sector. We see this as a natural part of globalization, a natural part of any country wanting to invest in a sector. And certainly, from my perspective, I see that as welcome.

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Cajing: The joint venture raised antitrust concerns in Europe, Japan as well as in China. How do you address their concerns?

Albanese: The iron ore joint venture is a production joint venture. Essentially, it's a box where you put cash in at one end and you get tons of iron ore at the other end. Each of us takes a respective share of iron ore in tons, and we will each independently market as we have been marketing for decades and decades. We may take one direction, they may take another direction.

But again, I'd really see that being no different than what we do today, which is essentially independently marketing our respective streams of iron ore. We certainly respect the fact that, as a joint venture, this will be subject to a wide range of regulatory approvals all over the world. And certainly the planning is under way to basically take that through those various competition approvals.

Caijing: In terms of the assets sale of Rio Tinto, how many assets do you think you will need to sell to bring the debt to a manageable level?

Albanese: What we've said during the course of this year is we've had an objective to bring our debt levels down by US$ 10 billion. And we announced that back in December 2008. And I think the transactions that we've announced over the past few weeks will do that.

But, that being said, there are a number of assets that are non-strategic to Rio Tinto. We will continue to explore their sale. For example, the downstream aluminum businesses that we acquired with Alcan aren't really consistent with Rio Tinto's strategy or our business model. So we would see ourselves continuing to proceed with the disposal of businesses, again, assuming we come up with a commercial outcome that would be satisfactory to our investors

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Caijing: When did he tell you about the idea, or when did you start to discuss that seriously as an alternative to Chinalco's deal?

Albanese: Within 48 hours, I was on the phone with Mr. Xiong (Chinalco President Xiong Weiping), and basically I communicated to him that the two chairmen had met and this idea had been presented by BHP to Rio Tinto.

Caijing: And when did you and Chinalco start to revise the terms to look better than the BHP deal?

Albanese: During the course of the month of April and May, Chinalco recognized that we had to change the deal, address preemption, to address the fact that our share price had lifted quite a bit. The markets improved. Our options in the eyes of our shareholders had improved.

Caijing: After the deal, there have been many reports that you wrote to Chinalco to join the JV, and Chinalco said it wasn't true. Did you or do you plan to write Chinalco to join the JV with BHP?

Albanese: Certainly, during the course of the long range of discussions that we were having in this period of time, we were looking for a solution that would allow Chinalco and the joint venture to co-exist.

Caijing: Could you elaborate on that?

Albanese: We have a number of joint ventures all over the world with companies all over the world, including in the Pilbara, and I think what we were looking for would've, again, made sense for everyone. But it had to be something that worked for Rio Tinto shareholders and it's something that was very strong and approvable and endorsed by Rio Tinto shareholders.

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Caijing: Did Chinalco make any effort to revise the deal?

Albanese: There were very strong efforts on both sides to come to an agreement that would have made the approvals of the various regulatory and shareholders, and I want to compliment the Chinalco team for working very diligently, hard, and for having a very strong commercial acumen for what was required in the global marketplace for those shareholder approvals.

Caijing: About the BHP deal, when did you have that on your table and who proposed it?

Albanese: Because we're a dual-listed company, we have two AGMs (annual general meetings). The second AGM in Australia, effectively, on the 20th of April, was the retirement point for our outgoing chairman, Paul Skinner. And that was the point where our incoming chairman, Jan du Plessis, became the chairman-elect of Rio Tinto.

As is normal and typical as people come into senior roles, they do take the opportunity to meet their peers and other relevant companies, so the chairman of Rio Tinto met with the chairman of BHP Billiton after that the Australian AGM. And it was just really introductory – they had not met before. During the course of that meeting, the chairman of BHP Billiton suggested that it may be important to consider a joint venture for iron ore in Western Australia. Now this was not a new idea, which can be dated back to the 1990s. But it was the chairman of BHP Billiton who made the proposal to Jan du Plessis.

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Albanese: I'd like to go back to February.... We recognized during the negotiations leading to the February 12 announcement that this was going to require shareholders' and regulatory approvals. And we recognized that events could change over a course or period of time; we would both have to adapt ourselves as those events changed.

In the course of the contract we had provisions for the break fee. Recognizing that events change, either we could not come to shareholder approval or our board would change its recommendation. It was the amount that was typical for a UK-based transaction of this size, and at the end of the day, when the board made its decision, changed its recommendation, and we announced a rights issue instead, paid them that fee of US$ 195 million. We have already paid it, effective as of the end of last week…

The irony I think of this is that a lot of the improvement of our markets was generally because of the improving strength of the Chinese economy. I think the stimulus programs that have been announced have been quite effective in increasing iron ore, steel, coal and copper demand, and that's been helping the business. But it's also been raising our markets aggressively over time in April and May and leading into early June. Our shareholders increasingly said, "This is not going to be a transaction we're going to approve because the markets have moved past that transaction."

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Albanese sat down for an exclusive interview with Caijing Magazine in London to discuss the events of the past several months and his vision for Rio Tinto's future.

He said his company and Chinalco had worked hard to reach a mutually satisfactory agreement, and that he, like Chinalco officials, was disappointed by the collapse. He also defended the joint venture decision against critics who called it unfair to Chinese steelmakers and reflected bad faith.

Albanese noted that Rio Tinto quickly settled with Chinalco by paying a US$ 195 million breakup fee. And he said the door to future possible Chinese investors remains open.

Caijing began the interview with questions about the recent negotiations between Rio Tinto and Chinalco, which ended with the dumping of their proposed deal.

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Reactions in China were biting. Chinalco publicly voiced disappointment. Other critics were far harsher. The China Iron & Steel Association decried the Rio-BHP deal as monopolistic. And an editorial in the Beijing Times compared the company to an "unfaithful woman."

Through all this, Rio Tinto CEO Tom Albanese was on the hot seat. But he had been there before. Shortly after the 51-year-old executive rose to his current position in May 2007, BHP Billiton attempted a hostile takeover of his company. He survived after the takeover plan was rejected by his board on grounds it undervalued Rio Tinto's value.

Albanese, who has worked at the company since its 1993 acquisition of his previous employer, American miner NERCO, endorsed the Alcan purchase and strongly advocated the Chinalco deal. Now, following the collapse of the Chinese investment, some suggested Albanese should take the fall. But Rio Tinto Chairman Jan du Plessis announced that the board continues to support Albanese.