Rio Jumping At Shadows?

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

It’s hard to get an opinion on Rio Tinto ((RIO)) out of any broker at present given so many of them are working on some part of the takeover merry-go-round and are thus restricted.

ABN Amro did have a go this morning however, responding to what was an otherwise poor production result.

Across the globe Rio’s quarterly production was beset with problems of one form or another. If it wasn’t cyclones it was floods, and if it wasn’t power outages it was lower grades at some copper mines. Escondida nevertheless starred with a 13% increase in copper production.

While ABN has downgraded Rio’s earnings by 6.3%, the fact remains the market is not concentrating much on Rio’s production numbers at present. It’s all about prices and takeovers.

Rio is yet to announce its coal price settlements, despite suitor BHP Billiton ((BHP)) having already announced a 200% increase into Korea. Nor has an iron ore price settlement been forthcoming, with both rivals assumed to still be in a deadlock with China over removal of the freight discount. Nevertheless it has been expectation of higher prices across the spectrum, including recent bullish movements in the copper price, which have helped to set Rio’s share price on the move once more.

But the impetus yesterday came from rumours out of London suggesting BHP was about to up its bid from 3.4:1 BHP shares to 3.7:1, or even 4:1. It seemed an ill-timed abandonment of a proposed meeting in London was the rumour mill catalyst. BHP has since denied the rumours, and noted that the rush of management back to Australia was totally unrelated.

The market is hotly anticipating BHP will have to increase its bid if it is to secure its rival. Further fuel is added by a constant stream of rumours out of China regarding potential investments in either mining giant, and of the Chinese government attempting to weigh in on the argument rather than just the Chinese steelmakers themselves.

There is always the possibility of Chinese sovereign wealth fund involvement, but while China has enough stashed away to buy a fleet of Rios such a move would need Australian government approval. The Rudd government may be prepared to let the likes of Baosteel grab a stake (even though it is state-owned) but a big sovereign investment might be stretching the friendship. Kevin Rudd indicated on his recent visit, in any language, that he was not about to interfere on some diplomatic basis in the business of BHP, Rio and their iron ore. Pay up or shut up might be a crude summation.

The next question is as to whether BHP feels it needs to up the bid to appease the market. On yesterday’s closing prices the 3.4:1 bid provided a Rio price of $147.52, yet the 4% rally in Rio still only reached $146. Rio rallied despite its poor production report, and yet the market is still a bit hesitant. Does BHP need to pay up?

The next clue might come in BHP’s own production report, ABN suggests, due on April 23. If a similarly poor result impacts on the BHP price then Rio speculators might be left holding some thin air.

One thing is fairly certain and that is the BHP action will probably play out for a while yet. ABN, as about the only broker offering to do so, has set a target of $146.51.

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