Rio Tinto offers to buy larger slice of IOC

British mining giant Rio Tinto (RTP-N) intends to make a cash offer to buy all units of Labrador Iron Ore Royalty Income Fund (LIF.UN-T) for $13.50 per unit.

“The acquisition of the fund will provide Rio Tinto the opportunity to consolidate its position in Iron Ore Company of Canada (IOC),” says Leigh Clifford, Rio’s chief executive.

Rio picked up a 56.1% interest in IOC, Canada’s largest iron ore producer, through its acquisition of diversified Australian miner North Ltd.

The fund is an unincorporated, limited-purpose trust. Through its wholly owned subsidiary, Labrador Mining & Exploration Co., it owns an 18.9% equity interest in IOC. Japan’s Mitsubishi holds 25% of IOC. The fund is also entitled to a 7% royalty on all sales of IOC and a commission fee of 10 per tonne on all iron ore products sold by IOC.

IOC operates a mine, concentrator and iron ore pellet-making plant at Labrador City, Labrador, and port facilities at Sept-les, Que. The company runs a 420-km rail link connecting the mine to the port.

Rio’s offer represents a premium of about 17% above the fund’s average closing price of $11.85 over the last 10 trading days. The total value of the offer is $405 million.

The offer is being made through Rio’s wholly owned subsidiary, Rio Tinto Canada. It is conditional on at least 75% of the units being tendered and is subject to regulatory approval.

Trustees are expected to obtain an independent valuation of the fund in the next few weeks. Rio plans to mail its offer soon thereafter.

On Dec. 15, the fund was trading on the Toronto Stock Exchange at $13.95, up $2.45, or 21.3%, from its previous close.