The Great Debate UK
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.