Blackstone reported assembling China bid for Rio Tinto

By David Litterick
The Telegraph, London
Monday, December 10, 2007

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=VNDKSWF4XJY53QFIQ...

Rio Tinto shares climbed in London trading after the Daily Telegraph revealed that private equity firm Blackstone is planning an audacious break-up bid for the miner.

The US private equity giant is in the middle of putting together a consortium -- believed to include a Chinese sovereign wealth fund -- to mount the bid for Rio, currently the target of an unwelcome approach by rival mining giant BHP Billiton.

Blackstone is already believed to have appointed lawyers for the approach, and is in talks with bankers and public relations companies.

As part of its defence against the three-for-one share offer made by BHP, Rio has identified up to $30 billion of disposals it believes will drive shareholder value. These include its talc business, two uranium projects in Australia and the US, the Northparkes copper and gold mine in Australia, and the US Greens Creek zinc, lead, and silver mine.

However, Blackstone is ready to go further and break the business up completely. This would mean undoing this year's merger with aluminium producer Alcan, as well as selling off the company's main asset -- its iron ore business.

Blackstone believes the key iron ore operations are worth at least $110 billion, based on the L518 million valuation placed on Australian miner Midwest Resources by Chinese company Sinosteel. Sinosteel is in the process of lobbying the Australian government to allow its bid to go ahead. If successful it would be the first time a Chinese company has taken over a listed Australian business and would highlight China's willingness and ability to play a role in consolidation of the mining industry.

The $110 billion figure -- which compares with Rio's market capitalisation of $150 billion -- is based on Rio's existing proven reserves. However, it is believed further mineralisation in the Pilbara in Australia and at the Simandou project in Guinea could push this valuation and that of Rio as a whole even higher.

The iron ore assets are crucial to any deal involving Rio Tinto. The rationale for the approach from BHP -- which also has extensive operations in the Pilbara -- is the synergies the company believes can be derived from bolting the two companies' iron ore assets together.

China's insatiable desire for iron ore has sent prices soaring. The industry fears a combined Rio Tinto and BHP Billiton would give the resulting super major too much power.

Blackstone already has strong links with the Chinese after China Investment Corp, the $200 billion sovereign wealth fund, paid $3 billion for a 10 percent stake in the private equity giant ahead of its flotation earlier this year. Blackstone declined to comment.

Shares in Rio Tinto rose 49 to L57.95 in early morning trading. The stock has already more than doubled in value this year.

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