Comment: Price of loyalty too high for Rio

5th Jun 2009 13:58

"Very disappointed" must be an understatement for how Chinalco feels after Rio Tinto finally did what its shareholders had been demanding and scrapped their contentious refinancing agreement. Rio will have to pay the Chinese firm $195m, but that sum was firmly put into context by the £3bn jump in Rio's value today.For Chinalco, this supposed poison pill will taste bitter indeed. Four months ago it could look forward to having a major influence over the prices of its major raw material without having to shell for a full takeover of Rio Tinto. Now it is firmly on the outside, pressing up at the window while its erstwhile partner cuddles up to what used to be its bitterest enemy. The jump in the share prices of both Rio and BHP Billiton indicate the deal's significance. If they can persuade the regulators that keeping both of their marketing arms separate is sufficient to keep them honest, this looks a huge win-win for the two miners and a big lose-lose for poor old Chinalco. The combined iron ore operations at Pilbura, Western Australia will produce 270m tonnes of iron ore annually, making it the World's largest producer and comfortably outstripping Vale, the former number one at 240m tonnes. Merging the two companies' assets at Pilbura was a key driver behind BHP Billiton's attempts to takeover Rio Tinto last year. Analysts have long argued it made great commercial sense. The planned cost savings of $10bn per year bear that out in spades.The sticking point was always who was going to be in charge, now even that seems to have been resolved, at least for now. Rio also gets $5.8bn, which with the $15.2bn from the rights issue, finally gets the debt monkey off its back and gives it some breathing space to start looking forward again.The only odd thing is that with all of the plusses for Rio Tinto why it took so long for the board to make the decision to scrap the deal. Admittedly, things looked a lot different in February. Credit had dried up, metal prices were weak and a rights issue of the size of today's was a non-starter, so Rio maybe had few options, but as Chinalco found out today loyalty and gratitude only counts for so much.