Rio Tinto Acquires Riversdale Mining - Analyst Blog

Global miner Rio Tinto Plc. (RIO) formed a definite agreement with Australia-based Riversdale Mining Limited to acquire all of the issued and outstanding shares of the latter at an offer price of A$16 per share bringing the total consideration at A$3.9 billion. Rio Tinto decided to use its cash reserves and credit facilities to acquire the above.

A$16 represents a 46% premium to the one-month volume weighted average price (VWAP) of Riversdale shares on November 3rd and 24% premium to the one-month VWAP of Riversdale shares on December 3rd. The acquisition is expected to enhance Rio Tinto's production at a much reduced costs.

At present, Rio Tinto has queued up with a massive investment plan. This includes $800 million for completion of the underground block cave project at the Argyle Diamond Mine located in Australia, and an investment of $1.6 billion for the development of the Hope Downs 4 iron ore project, which is expected to be operational by 2013 with an annual capacity of 15 million tons.

Moreover, it also includes a $563 million MoU with Aluminum Corporation of China Limited, or Chinalco (ACH) for the development and operation of the Simandou iron ore project in Guinea.

With its long-life, low-cost assets and a strong pipeline of attractive growth projects, Rio Tinto has assets that can generate positive cash flow under difficult market conditions. Though commodity demand from China and other emerging economies has slowed in the last couple of months, management is confident that industrialization and urbanization will continue in these markets, thereby strengthening the demand for Rio's products.

China is expected to grow by 9% in 2010. The Chinese steel consumption is expected to increase 6.7% to 579 million tons in 2010. China is expected to remain the largest consumer of metals in the  coming years. Hence, the medium-term outlook for metal commodities remains encouraging.

Management expects the global demand for its key products such as iron ore, copper and aluminum to double by 2022, primarily driven by China, India and other emerging markets. Rio Tinto's investment in various growth projects will enable it to capitalize on the long-term demand.