Mining giant Rio Tinto Ltd faces an uphill battle to persuade shareholders to back a tie-up with China's State-owned Chinalco that would bring in $19.5 billion and help it pay down its huge debt.
Chief Executive Tom Albanese postponed a trip to Australia, staying in London to deal with shareholders, including top institutional owner Legal & General Investment Management, who have complained the deal favours one investor over all others.
Chinalco, China's top aluminum maker, agreed last week to pay $12.3 billion for stakes in Rio's key iron ore, copper and aluminum assets and $7.2 billion for convertible notes that could potentially double its equity stake in Rio to 18 percent.
The deal, designed to help Rio Tinto pay down some of its $39 billion of debt and gird it for a worst-case recession, needs approval from a simple majority of Rio shareholders.
"It solves one or two of their problems, albeit it does involve them having to sell some assets you'd probably want to see them keep," said Tim Barker, resources analyst at BT Investment Management, which owns Rio shares.
He said he was still assessing the deal and how it would compare with a rights issue, which some shareholders have been pressing for.
Shareholders are questioning whether Rio Tinto is getting a good enough premium for the asset stakes; a fair premium for the convertible bonds; the involvement of Chinalco, a customer, in marketing joint ventures; and the impact of Chinalco getting two seats on Rio's board.
"China's tricky. They're a pretty big customer," said one portfolio manager, who, like several other Rio shareholders, did not want to be named due to the sensitivity of the issue.
In another example of how Chinese resources firms are coming to the rescue of debt-troubled Australian miners, trading group Minmetals on Monday offered to buy Oz Minerals Ltd, the world's No 2 zinc miner, for $1.7 billion, a 50 percent premium to Oz Minerals' last traded price.
Indicative of the uncertainty surrounding the Chinalco deal, Rio's shares have fallen 2.3 percent since it was announced, while former suitor BHP Billiton's shares have fallen a third as much and the broader market is up 1.2 percent.
"No one's happy," said another portfolio manager in Sydney. "They've forced shareholders into a corner and said: come up with an alternative or face the consequences."
Australian fund managers who were scheduled to discuss the deal with Albanese in Sydney on Monday instead had lunch with Chief Financial Officer Guy Elliott.
"The shareholders that matter are in the UK," said the portfolio manager in Sydney, adding it made sense for Albanese to stay in London to tackle the biggest institutional holders.
Investors in Rio Tinto Plc, the UK-listed shares, hold 78 percent of the group's total stock, while investors in the Australian-listed shares own 22 percent. Chinalco will not be voting its 9 percent stake in Rio. Those at the lunch in Sydney said the discussion was frank and constructive.
One complained that while Rio said its options for raising the amount of money it wanted were very limited, it gave no details on how much it was offered by anyone else.
"You don't know how big a gap there was between what Chinalco and others offered," said another portfolio manager in Sydney.
There has been speculation BHP approached Rio about asset stakes after dropping its $66 billion hostile offer last November and was rebuffed. BHP declined to comment.
Queensland Investment Corp, the top shareholder in Rio's Australian-listed shares, and two others declined to comment on the Chinalco deal, saying they preferred to talk to Rio directly.
Is the company listening?
"The Rio Tinto chairman, chief executive and finance director are all talking with shareholders," said spokesman Ian Head.
Rio Tinto plans to hold shareholder meetings to vote on the deal in May, but no dates have yet been set. It expects the deal to be completed late in the second quarter, or soon after.