Neil Collins

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One small step for Rio Tinto…

May 21, 2009

…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.

 This is effectively a 10 billion-dollar poker game. If the reports are true, then Chinalco has decided to place this concession card on the table, and see whether the shareholders will fold. Despite the strenuous efforts by the management to persaude them to cave in, they should stay in and watch how the rest of the cards fall.

 Thanks to the improvement in both commodity and share markets, the shareholders’ hand is much stronger than it was, although to listen to the public pronouncements from the Rio directors, you’d hardly have guessed it. The capital markets are open for new share issues, but the new danger is that a few more bad days could close them, and Rio will have missed another opportunity.

 There is obvious merit in having the Chinese on the register, but allowing them to get within a single step of effective control is another matter. There are many better ways to continue this game. It’s time the board signalled that it has noticed.