Delving into the Rio TintoChinalco deal by lindahy


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									16                                       JUNE 2009                                                                                        


Delving into the Rio Tinto/Chinalco deal
                                                nerves for many reasons.                       Coles turnaround
                                                   Firstly, the convertible bonds have a       and top of the
                                                strike price of $45, which in hindsight is a   cycle price paid for
                                                very sweet deal.                               Coles; Woolworths
                                                   And, of course, we have the patriots        was      seen      as
                                                up in arms. FIRB approval is far from          invincible (and still
                                                guaranteed and it is increasingly likely       is by many).
                                                that the deal would not be approved in its        However, it was
                                                current form.                                  a case of backing
                                                   We applaud Chinalco’s deal making           a bombed out blue
                                                efforts, however we think a rights issue       chip and we think
                                                will provide a fairer outcome for all Rio      Rio is in a similar
                                                shareholders and we believe the market         position.
                                                is factoring that possibility in despite          Management is
                                                assurances from Rio that it is committed to    under siege over
                                                the deal.                                      its debt, the top of Wesfarmers and Woolworths performances
                                                   We think Rio is in a similar position to    the cycle price paid                          about its future.
                                                where Wesfarmers found itself at the start     for Alcan and its rushed decision to say          Given the stock’s freefall, there is clearly
                                                of the year.                                   yes when Chinalco asked “may I have this plenty of downside potential, so brace
                                                   Wesfarmers was marked down heavily          dance?”                                       yourself for some short-term volatility;
                                                by the market early in the year on fears          BHP now trades on a forward 2009 PE of however we recently recommended Rio as
                                                over its capital position; however, since      14.6 and 2010 PE of 19.8 while Rio trades a buy at around $60.14 in anticipation of a
                                                the second capital raising, the stock hasn’t   on respective PE’s of 12.7 and 11.7, which strengthening share price.
ShANNoN rIvkIN                                  looked back and has made up some lost          while not at the extremes of Wesfarmers           So far the trade is looking good (again,
CoMMENT                                         ground on Woolworths.                          and Woolworths is still not justified in our this was at time of writing), however
                                                   Wesfarmers hit a low of $14.81 on           view and we expect that valuation gap to anything can happen in the market and
WE NOTED in The Rivkin Report (April)           February 9 (the rights issue was conducted     close.                                        we will be looking to exit this trade in a
that Rio Tinto would not be devastated if       in February), putting it on a forward             Something has to give – Rio needs to pay relatively small period of time, touch wood
the Chinalco deal fell over.                    PE of 8.2, which was less than half of         down debt.                                    at a profit.
    At the time of writing, the original deal   Woolworths’s forward PE of 19.                    Either the Chinalco deal will go through,
is looking far from certain and rumours are        We argued at the time that the valuation    a rights issue will be undertaken, assets Shannon Rivkin, director, The Rivkin
flying thick and fast that a rights issue may   differential was not justified and it should   wil al be sold or any number of alternatives Report
replace some or all of the Chinalco deal,       close over time.                               or combinations will eventuate.               Under the mentorship of his father Rene
somewhat explaining the recent poor share          That gap has begun to close with               Rio will not fail and we believe the Rivkin, Shannon Rivkin developed a
price performance.                              Wesfarmers now on a 2009 PE of 12.3 and        recent sell off provides an ideal opportunity passion for equity markets and joined The
    Chinalco must have taken some lessons       Woolworths 17.7, which can also be seen by     to pick up shares in the distressed miner.    Rivkin Report Investment Team in 2002.
from Warren Buffett in deal making              the relative share price performance in the       In an interesting twist, UBS believes He is now a director of The Rivkin Report,
because the Rio proposal is strikingly          graph above right.                             BHP may underwrite a rights issue in overseeing the analysis and production
similar to Buffett’s Goldman Sachs grab.           Woolworths has not participated in          return for a joint venture in the Pilbara, associated with the weekly Report and
    To refresh everyone’s memory, Rio was       the rally of the last few months, whereas      which would deliver substantial cost related products.
to issue $US7.2bn in convertible notes          Wesfarmers has been one of the standout        savings to both parties. Sounds good.
and sell $US12.3bn of various assets to         performers.                                       A rights issue could well deliver support
Chinalco.                                          Remember back in February when              to the share price because it would reduce
    The proposal is hitting a number of         Wesfarmers was drawing fire over its debt,     balance sheet risk and remove uncertainty

  ASX Metals and Mining Index Commodity Prices                                                     Aluminium           London             US$/tonne             May 22          1405
     Tuesday May 26                                             3560.6                             Copper              London             US$/tonne             May 22          4585
     Monday May 25                                              3512                                                                      US$/ounce
                                                                                                   Gold                New York                                 May 22          956.5
     Friday May 22                                              3478.8                                                                    spot

     Thursday May 21                                            3561.3                             Lead                London             US$/tonne             May 22          1422

     Wednesday May 20                                           3518.9                             Nickel              London             US$/tonne             May 22          12,500

     Tuesday May 19                                             3469.3                             Platinum            New York           US$/ounce             May 22          1153
                                                                                                   Silver              New York           US$/ounce             May 22          14.69
     Monday May 18                                              3379.8
                                                                                                   Tin                 London             US$/tonne             May 22          13,950
     Friday May 15                                              3408.1
                                                                                                   Uranium             New York           $US/pound             May 18          51
     Thursday May 14                                            3324.5
                                                                                                   Zinc                London             US$/tonne             May 22          1467
     Wednesday May 13                                           3562.6

     Tuesday May 12                                             3573.5                          LME Metal Stocks (tonnes, as at May 25)
     Monday May 11                                              3652.1                             Aluminium                                         4,191,975
     Friday May 8                                               3644.7
                                                                                                   Copper                                            333,375
     Thursday May 7                                             3665.5
                                                                                                   Lead                                              74,525
     Wednesday May 6                                            3500.8

     Tuesday May 5                                              3565.9                             Nickel                                            109,776

     Monday May 4                                               3484.3                             Tin                                               14,350
     Friday May 1                                               3385.3
                                                                                                   Zinc                                              317,750

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