Rio Tinto has issued $3.5 billion (£2.3 billion) worth of bonds and remains committed to sealing a $19.5 billion deal with Chinalco, the company said ahead of the start of its annual shareholders meeting this morning. The mining company said it priced $2 billion-worth of five-year bonds with a coupon of 8.95% and $1.5 billion-worth of 10-year notes paying 9%.
Senior resources analyst Mark Taylor said Rio's bond issue was at a big premium to recent bond sales by larger rival BHP Billiton. "It shouldn't come as much of a surprise because at present Rio is a much higher risk company than BHP," Taylor said this morning.
Last month, BHP Billiton raised a total of $6.25 billion in two weeks in euro- and dollar-denominated bonds at rates ranging from 4.25% to 6.5%. The company has said it would use the proceeds for general corporate purposes but, with $6.25 billion up its sleeve and scope to raise far more, its cash on hand resembles a war chest.
Rio's chief financial officer Guy Elliott said the company was "terming out" its debt. "With the bond markets open for business, it makes sense for us to be taking advantage of the opportunity," Elliott said.
Rio's debt load
In a quarterly review, chief executive Tom Albanese said the company had agreed to sell $2.5 billion-worth of assets in the quarter. The asset sales span the globe and include the Jacobs Ranch coal mine in the US, undeveloped potash assets in Argentina and Canada, the Corumba iron ore mine in Brazil and the Ningxia aluminium smelter in China.
Rio has been sweating out repayment of nearly $9 billion in debt due later this year but its net debt stands at $40.7 billion, mainly from its acquisition of Alcan last year.
Morningstar's Taylor said the bond issue gave the company some breathing room. It is scheduled to repay $8.9 billion of debt in October. The bond issue and asset sales, including divestments last year, total $9 billion. "If we combine the proceeds of the bond issue with the asset sales to date, that should pretty much cover the debt that's due this year," Taylor said. "You'd have to say it takes some of the near-term risk out of the stock."
Committed to Chinalco deal
At its annual general meeting, investors were expected to meet the miner's plans to sell bonds and assets worth $19.5 billion to China's state-run Aluminum Corporation of China (Chinalco) with sharp criticism. However, Albanese said the company remains determined to see it through.
"We remain committed to delivering the Chinalco transaction and our focus is on successfully navigating the regulatory processes before putting it to a shareholder vote," he said, referring to approvals needed from Australian and Chinese foreign investment regulators.
Improved metals prices and a return of stockmarket stability have eroded the scant support Rio had for the deal.
China recovery seen in second half
Debt-ridden Rio's troubles began late last year when credit began drying up and were augmented by falling demand for resources as industrial production waned, primarily in China, the jewel in the crown of the resources boom. However, Rio said in its first-quarter review it expects China's steel demand to recover later this year.
"Global iron ore guidance for 2009 remains around 200 million tonnes with an expected recovery in Chinese steel demand in the second half of 2009," the company said.
Rio's first-quarter iron ore production was 15% below the same period a year ago due in part to heavy rains at its Pilbara operations in Western Australia.
Mined copper production rose 9% over the year and refined copper production grew 33% from a year ago, mainly due to higher concentrate grades at Kennecott Utah Copper and higher throughput the Escondida mine in Chile. Bauxite production fell 19%, alumina softened 2% and aluminium production slid 6% owing to production cutbacks in response to weak demand, Rio said.
