Big Miners Get Support for Joint Venture

If you think you've had a busy week, London-based miner Rio Tinto (NYSE: RTP  ) almost certainly can top you.

Among its activities, Rio Tinto announced that its first-quarter net income dropped 45% to $1.6 billion from last year's $2.94 billion. In making the announcement, it attributed the decline primarily to reduced earnings from its aluminum and copper units.

In addition -- and more importantly -- Rio completed a $15.2 billion rights offering with its current shareholders. Specifically, it issued 21 new shares for every 40 shares outstanding to raise the funds. The result will of course be dilution for existing shareholders.

At about the same time, Rio received an endorsement from Australia's trade minister, Simon Crean, for an iron ore joint venture with BHP Billiton (NYSE: BHP  ) . Under the terms of the deal, the two companies will share ore operations in Western Australia.

But while their joint production efforts are expected to bring about substantial savings, each will operate its own marketing arm, thereby maintaining competition between them, as Mr. Crean noted. The two companies, along with Brazil's Vale (NYSE: VALE  ) , control much of the world's quality iron ore. The venture with BHP will yield $5.8 billion to Rio Tinto.

The total $21 billion it's taken in will permit Rio to make timely payments toward the nearly $40 billion it borrowed in 2007 when it topped Alcoa (NYSE: AA  ) to acquire Canada's Alcan. The two-part combination also cancelled the need for an added $19.5 billion investment in Rio Tinto by the Aluminum Corp. of China (NYSE: ACH  ) . Chinalco, as it is commonly called, currently owns a 9% stake in Rio Tinto.

The proposed investment would have approximately doubled Chinalco’s interest in Rio Tinto and potentially given it two board seats. On that basis alone, and despite the dilution involved, I'm convinced that Rio took the appropriate approach in not permitting the Chinese company to raise its stake.

And while improving market conditions permitted Rio to push Chinalco aside, the London-based company warned this week that the picture for commodities continues to look unclear. In making the announcement, Rio singled out spot iron ore, copper, and aluminum as areas of continuing concern.

Until last week, Rio Tinto's U.S. shares had well more than tripled from their lows near $60 in December. Because they clearly are pulling back due to the rights offering and commodity concerns, my strong inclination is to watch the company closely, but to avoid initiating or adding to positions in its shares.

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Fool contributor David Lee Smith doesn't own any shares in the companies mentioned in this article. He does welcome your questions or comments. The Fool has a disclosure policy.


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10/23/2014 10:34 AM
BHP $59.00 Up +0.01 +0.02%
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RTP.DL $0.00 Down +0.00 +0.00%
Rio Tinto plc (ADR… CAPS Rating: ****
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ACH $10.58 Up +0.10 +0.95%
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