Commentaries

Now raising intellectual capital

Goodness, now Rio finds it can afford a dividend

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Can it really be a mere six months since Rio Tinto agreed to sell its birthright to Chinalco, losing its chairman-designate in the process? Indeed it can, and it shows how fast things change in the whacky world of commodities. In February, the directors panicked that the business might run out of cash; now they are signalling that they should be able to find $1.75 billion, or around $1.15 a share, for a dividend next year.

In hindsight, it looks frightfully clever of them to use the balance sheet of China Inc. (for a mere $195 million break fee) to buy time to find a better way out of the financial hole they dug. After all, the Chinalco deal could not be consummated without shareholder approval, which could not be sought until various regulators round the world had agreed it, a process bound to take many months.

In fact, it looks as though they got the right answer for the wrong reason, allowing the new, post-Chinalco chairman Jan du Plessis to brag about “renewed financial strength and a leaner cost base.” Even so, it’s a bit rich for the directors to boast about “delivering on commitments made in December 2008”.

Thanks largely to last month’s thumping $15 billion rights issue, debt is no longer a problem. All the debt incurred to overpay for Alcan in 2007 has now been repaid, so Rio can get on with the important task of rebuilding its relationship with China, the most important customer for its iron ore. There is much to do here, following the arrest of its negotiating team, but the heat seems to have gone out of the confrontation, and neither side can do without the other.

China Rio arrests pit country vs company

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    Country or company — where does your loyalty lie? For Beijing, there is simply no question. If you are Chinese — or a foreign passport holder of Chinese origin — you work for China first, second and third.
    The arrest of four Rio Tinto Ltd employees — three Chinese and an Australian — on charges of stealing state secrets is a stark reminder of the dilemma this poses for foreign companies in China, where it is impossible to operate without local staff.  The flip side is the pressure facing Chinese nationals who work for foreign companies. In their enthusiasm to please employers, these employees often risk overstepping the mark and falling foul of the law.
    China, like many countries, does not recognise dual passport holders. So woe betide anyone who was born in China or whose parents were Chinese, who are sure to feel the full force of Beijing’s powers if they are deemed to have broken the rules.
    And in this case, it is not just foreign company staff who have been arrested; the head of iron ore with the foreign trade and investment unit of state-owned Chinese steel company Shougang Group has also been detained.
    Foreign companies rely on their local staff for an understanding of local business mores as well as language, contacts and know-how. And there is often a blurring of the lines between what is acceptable business practice at home and in the country in which they are operating.
    Corporations are no angels when it comes to digging for information. Some mining companies have set up research teams in China, with an emphasis on building market intelligence.
    This is asking for trouble in China where the definition of what constitutes a state secret is particularly strict, especially when it comes to business or economic information.
    But as Anglo-Australian miner Rio and its employees may have found to their cost, the implementation of such laws can be patchy and  unpredictable.
    For while Beijing may not stick to the letter of the law as long as the spirit is adhered to, it can be a completely different story when the government wants to make a point.
    In this case, it’s impossible to ignore a long deterioration in China’s relations with Rio and BHP Billiton, Australia’s two main exporters of iron ore. It can be seen as the final phase in the downward spiral of relations as China’s expanding steel industry and booming demand for imported ore have given all the negotiating leverage to Rio and BHP and sent prices soaring.
    The detentions come just after a June 30 deadline passed for iron ore price talks between China and Rio. And don’t forget, Beijing is still smarting after Rio ditched a deal with Chinalco in favour of an iron ore joint venture with BHP.
    But while the move is bound to make Chinese employees of foreign firms more cautious, it won’t stop the whispered confidences which inevitably accompany business deals the world over.

from Alexander Smith:

Beijing’s Rio talks must avoid iron fist

Chinese anger at Rio Tinto for reneging on a deal with aluminium group Chinalco and opting instead for an iron ore joint venture with BHP Billiton last month was understandable. Indeed, China has good reason to question the Rio-BHP JV on competition grounds.

But the detention of four Rio Tinto employees -- on suspicion of espionage according to Australia's foreign minister -- bang in the middle of sensitive negotiations on iron ore exports to China is a
dangerous step in the wrong direction. Beijing must either justify the arrests publicly or release the Rio staff immediately.

from Neil Collins:

Rio: We rejoice at a sinner that repenteth

(Refiles on October 19, 2010 to add disclaimer for author's personal investment. Neil Collins is a Rio Tinto shareholder.)

“The directors of Rio Tinto believe that attracting, developing and retaining a skilled and engaged workforce is critical to business performance”. Thus Jan du Plessis in his long, rambling chairman’s statement to Rio shareholders today asking them for a spare $15 billion to dig them out of the hole their directors have dug for them.

from Neil Collins:

A chink in the Chinalco armour

Xiong Weipeng has been speaking to Caijing magazine. Perhaps he was speaking in Mandarin, which might explain why something seems to have been lost in translation.

 Xiong is president of Chinalco, the Chinese state-owned aluminium group which is trying to muscle in on Rio Tinto, doubling its holding to 18 per cent and taking big minority stakes in its best mines.

from Neil Collins:

One small step for Rio Tinto…

...and a giant leap for Chinalco, the Chinese state-owned aluminium company which wants to raise its stake in the miner to 19 per cent, as well as taking chunky minority stakes in Rio's best mines.

 Smoke signals from Australia suggest that the Chinese have noticed the real possibility that their sweetheart deal will be overturned by Rio's disgruntled shareholders, and they are suggesting new terms to limit the holding to 15 per cent.

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