Chinalco Deal Rankles Rio Tinto Shareholders

The sixth trading week of 2009 saw a blockbuster deal struck between Rio Tinto and Aluminum Corp. of China (Chinalco), which has the Chinese state-owned major pumping a much larger than anticipated US$19.5 billion in cash into the debt-laden mining giant in return for up to an 18% shareholding, US$7.2 billion in convertible bonds, two seats on the board and a jumble of prized Pacific Rim iron ore, aluminum and copper assets.

• Now comes the hard part for Rio Tinto management: trying to pitch this sell out to the Chicoms to an angry group of Rio Tinto institutional shareholders left on the sidelines after they were denied participation in a rights offering as another way to drum up the badly needed funds. Shareholders weren’t given a say on the rights-issue idea, but will be able to vote on the Chinalco deal, likely in May. These Rio Tinto shareholders are doubly frustrated, having watched management rebuff a plum US$66-billion takeover offer by BHP Billiton a year ago at a market top, only to strike a deal now at what’s perceived to be a market bottom.

According to the U. K.’s Sunday Telegraph, these Rio Tinto shareholders are prodding BHP Billiton to reconstitute some kind of takeover, though BHP is required to wait until November — a year after it abandoned its first bid — to launch a second one.

Canadians have a stake, too, with the Chinese government on the verge of getting a much larger role in running Rio Tinto’s substantial aluminum, iron ore and diamond assets in Canada.

• By axing 686 jobs at its Sudbury, Ont., operations in early February, Xstrata looked at first glance to have reneged on its promise not to lay off Canadian employees for three years following its $18-billion takeover of Falconbridge in July 2006.

While foreign companies must prove that takeovers of Canadian companies will be a “net benefit” to Canada under the Investment Canada Act, Xstrata says it’s using a clause that allows it to renege on commitments due to circumstances “beyond its control” — in this case, the plummeting price of nickel.

As a mitigating factor, the company and the federal Industry Ministry point to Xstrata’s commitment to spend $40 million on exploration in the Sudbury region and $250 million developing the new Nickel Rim South mine in 2009 and 2010.

However, in an agreement hammered out by Xstrata and Mine Mill Local 598 of the Canadian Auto Workers, the newly laid off unionized workers will receive termination pay bi-weekly until June 3, 2009. In other words, with these extended payments, Xstrata is more or less meeting its three-year commitment.

• Rusoro Mining and Endeavour Financial each got a major dressing down by Ontario Superior Court Justice Peter Cumming (no relation to the editor) in a decision on a case brought to court by gold developer Gold Reserve.

The sweeping decision forced Rusoro to abandon its hostile takeover bid for Gold Reserve — a bid that was already doomed based on only 2.7% of Gold Reserve shares so far being tendered.

The crux is that Endeavour, while making $1.2 million serving as an adviser to Gold Reserve over four years, was also a creditor, shareholder and adviser to Rusoro, and had access to Gold Reserve’s confidential data in the lead-up to the hostile bid. Endeavour has an exclusive alliance and shares office space with privately held Fiore Financial, led by Frank Giustra and Gordon Keep. Keep is a Rusoro director.

As Justice Cumming wrote in his decision of the obvious conflict of interest: “In my view, in advising Rusoro on the hostile takeover bid, there is a prima facie case that Endeavour was knowingly acting against the interests of Gold Reserve in a material way.”

Later, Cumming wrote that: “Rusoro, in effect, bought the assurance and advantage of using Gold Reserve’s trusted financial adviser, Endeavour, and its possession of relevant confidential information, in substitution for its own due diligence.”

The decision also made note of Rusoro’s surreptitious drilling of four reverse-circulation holes on Gold Reserve’s Choco 5 property in Venezuela just prior to the hostile bid. Cumming wrote that the incident is “perhaps more generally indicative of the approach of Rusoro of its business dealings.”

Have a look at the verbal spanking, uh, decision at: www.rippmedia.com/GReserve.PDF