Are BHP and Rio Tinto Courting Again?

The weekend was hardly a time of rest and relaxation for Rio Tinto (NYSE: RTP  ) , Aluminum Corp. of China (NYSE: ACH  ) -- aka Chinalco -- and Australian Treasurer Wayne Swan, among others. Swan's rejection of a smaller Australian-Chinese mining merger could be an insight into the Australian government's stance regarding Chinalco's proposed increased investment stake in Rio Tinto. 

Rio Tinto needs the $19.5 billion infusion Chinalco would provide, potentially doubling its stake in the Anglo-Australian giant to 18%. This would allow Rio Tinto to make good on a nearly $10 billion debt payment coming due during the fourth quarter. The debt was incurred in 2007 during happier days for the credit markets, when Rio Tinto borrowed more than $38 billion in cash to buy Canada's Alcan, trumping a bid from Pittsburgh-based Alcoa (NYSE: AA  ) .

Now things have changed, and Rio Tinto needs funds for its debt repayment this year. Its prospects for receiving Chinalco's help were perhaps diminished over the weekend when Swan rejected an effort by China Minmetals Corp. to acquire Australia's OZ Minerals Ltd. While a portion of Swan's rationale involved OZ facilities covering an Australia weapons testing range, the decision nevertheless may have implications for Rio's proposed sale.

Despite a potential nixing of the Chinalco deal by Australian authorities, there appear to be other outlets open to Rio Tinto. For instance, a rights issue is a possibility, as is a bond offering. But neither of these options would likely take care of the company's debt repayments in both 2009 and 2010.

Rather, and perhaps not surprisingly, Australian mining giant BHP Billiton (NYSE: BHP  ) is rumored to have resurfaced in the Rio Tinto picture. BHP attempted for months to attract Rio Tinto through a pair of offers that the latter's management rejected, but almost certainly now wishes it had gobbled up. And when the market swooned and the second offer was retracted, I remained unconvinced that we had heard the end of the story of the two companies.

Perhaps we haven't. So, all Foolish investors with a notion that commodities likely will again head north -- and that's probably most of us -- should, in my rarely humble opinion, pay extremely close attention to Rio Tinto and BHP Billiton as well. I'm not sure this story is over, and its conclusion could prove profitable for shareholders of both companies.   

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Fool contributor David Lee Smith doesn't have financial positions in any of the the companies in the above article. He does, however, welcome your questions or comments. The Fool has a disclosure policy.


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