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RIO - RIO TINTO LIMITED


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Depending on what an investor is looking for, this deal from RIO's angle:

 

1) they now have a "rich" partner and in a single stroke they have solved their debt problem instead of dragging on for years. In a climate of credit crunch and econ slowdown, one can imagine what the uncertainty and potentially high credit cost will do to its share price.

 

2) they are now the "preferred" or "favoured" supplier of iron ore and other commodities to the new demand engine in the next 10, 20 years. The demand preferential will surely place tremendous pressure on BHP and Vale during the current "low cycle" - how long this will drag on at this point is hard to tell, but it will be a safe bet to expect BHP and Vale's sales volume taking some hit. How much and how big? Just wait and see.

 

Long term, RIO will be better positioned than both BHP and Vale in dealing with the boom bust cycle in commodities due to this new relationship with China and the certainty of demand. From biz planning, development and expansion angle, this is a great plus (although I expect not all will agree with me in this point).

 

3) instead of waiting to be picked to pieces by BHP, RIO is now in a position to compete with BHP in picking on/up other distraught resources; instead of being a prey, it is now a potential predator.

 

4) national interest? You really believe BHP is lobbying for Australia's interest? Michael Pascoe has a good write up on this. Go check him out. In any case, there is always a vested interest working behind every blend of politics and biz talk, as an investor, you choose what you want to believe in - if this deal gets thru' my bet will be on RIO while BHP will be under pressure.

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:lol:

i knew you can't hide anymore when you saw this deal!!

lifted up your post name!! hahaha

Happy new year NH!!

and not to worry about posts got pulled brother, we all got these type spancking by ss.

for better or worse----it kept personal attack at bay at least!!

 

if the deal going through, then shorts on BHP will be good idea!!

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Hi wolv,

 

I know your position is the one taken by most commentators. Indeed all the signs said that RIO overpaid for Alcan. In any case it seemed completely uncharacteristic of them as their history shows they normally sell during booms and buy during busts.

 

But personally, I agreed with RIO's assessment at the time that the acquisition would be value creating.

 

Out of the $42B price tag, they expected $15B in sales, leaving a net price tag for the aluminium business of $27B. At the time it wasn't hard to see how it could've paid for itself fairly quickly. There some, including RIO, who were beginning to predict a good run up in the price of Al (at the time it was lagging other commodities in terms of price rise), fueled by rising electricity prices, which in turn was the result of soaring coal prices. Under this scenario Alcan, with its cheap, clean energy, would really take off. The forecast among analysts at the time was for a flat Al price, so I don't know if any analyst really modelled Alcan's worth based on RIO's own assumptions about the Al price. So we'll never know just how valuable Alcan could've become.

 

As to the BHP takeover, you made the comment:

"if they really thought the price undervalued their shares then there is no explanation on why they are now selling equity to Chinalco for a fraction of what BHP was offering"

 

You do have a point there. Still, BHP withdrew its offer pretty quickly after Lehman collapsed, when the world presumably changed overnight. My guess is that by the time it was apparent a recovery in the global economy was not going to happen in the near future, e.g. around Oct/Nov 2008, when BHP dropped its bid, it was too late for RIO to change its mind. Still, there's an argument to say they could've reacted to the change in circumstances quicker than BHP could've.

 

Henrietta,

 

I have to disagree, no matter how high an executive's salary is, clairvoyance is never a part of the required skill set. ;)

 

I guess it comes down to whether you think the GFC was predictable or not. I strongly believe it was not. Many of the commentators who predicted the meltdown had been worrying about one thing or another for many years. Whether it was the trade deficit, run on the dollar, US government debt, multi-decade cheap credit, etc they all found a reason to predict meltdown sometime in the future. Many of the were wrong year after year in the run up to the meltdown as the economy boomed. Then when catastrophe came they were suddenly hailed as wise and insightful. The thing is, not even the ones who predicted the exact cause of the meltdown forsaw its seriousness. There were only a couple of prominent financial experts who predicted a housing burst leading to disaster - Robert Shiller and Jeremy Grantham - and both have said something to the effect of the situation turning out to be far more dire than anything they could've expected.

 

Another way of looking at it is this. It's widely acknowledged that the failure to save Lehman brothers is what triggered the real meltdown we see today. Lehman's fate was in the hands of the US government. How could anyone have predicted, back in 2007, whether the US government would make the right choice when it came to bailing out Lehman brothers?

 

To me there just seems to be a terribly large amount of randomness in all this, none of which could've been forseen years in advance.

 

 

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Hungry,

 

Thanks! Find it hard to stomach all these pessimistic talks thus far, gotta do my bit to talk it up...

 

EB,

 

I was not hiding, but taking a break and snooping in. :) Political decision is the BIGGEST or at least a MAJOR market changing factor, the mod has to come to his good sense to know this and to allow us to engage in it... for example: the stimulus packages from various countries are some of the biggest investment $$$/decisions ever made in this world and in history, if we want to discuss this subject and chase these money, we can't avoid talking politics globally...

 

In any case, to argue for RIO, attached is the SSE index - for those who believe the Chinese econ is crashing I think they are not looking far enough. The econ may be at a low at this point, but the stock market, if it is a leading barometer of what is to come, is indicating the Chinese econ is recovering. In fact the more negative the views are of the Chinese econ, the better will be the eventual surprise. Take a look at the SSE index volume, it's been accelerating lately. If the econ is a basket case, who are these people who poured their money into the stocks? While the investing public is holding back, the investment funds and the smart money are quietly picking up the cheap stocks over there. As usual, it's these early birds that will be the eventual big winners.

 

And the hot sectors over there are? Well, here's a hint - Singaporean fund, Temasek has just hired Chip Goodyear to run their investment for them... and Chip's expertise is in?

 

Yeap! Commodities! ... I think RIO will be hot once the deal gets done.

post-4765-1234502959.jpg

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Hi Herger

 

Another way of looking at it is this. It's widely acknowledged that the failure to save Lehman brothers is what triggered the real meltdown we see today. Lehman's fate was in the hands of the US government. How could anyone have predicted, back in 2007, whether the US government would make the right choice when it came to bailing out Lehman brothers?

 

Ahh ....... so it wasn't the trillions of dollars of financial gambling with worthless derivatives . All they had to do was save Lehman Brothers.

 

 

Cheers

J

 

 

 

 

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Singaporean fund, Temasek has just hired Chip Goodyear to run their investment for them... and Chip's expertise is in?

 

NH

I read that story in last w/e AFR too. The same thing xed my mind. A prev investment banker & a commodity expert. (some would disagree I suppose)

The first foreigner to be given this position, so they would have given it serious consideration.

Cheers

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hi herger

 

it seemed completely uncharacteristic of them as their history shows they normally sell during booms and buy during busts.

 

i think this is the bit that hurts shareholders the most. the discipline shown previously went out the window.

 

no matter how high an executive's salary is, clairvoyance is never a part of the required skill set

 

...but taking responsibility should be.

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NH

you are prety much spot on for this deal as far as i can see.

as for why Tom didn't take the BHP deal early on??..... well, Tom just try to squeez bit more $$$ out of BHP at the time when market condition is red hot.

don't think Tom be able to predict Hank Paulson would let Lehman go bust that trigered sudden bubble bust for commodities. i guess no one be able to see that coming after we saw they bailed out Bearstearm.

as for Rio share dilution.... that's not a concern what's so ever. if you let chiness have that stake, don't think they ever want to sell it. only divys will be dilutted and it will be rewarded for securr commodity contracts. better than try to raise money from the bankers at current situation i'd say!!

BHP is currently runing around try to block the deal. it's easy for BHP -----put up the $$$$ or shut up! as far as i can see!!

 

so here comes the pair trade-- short BHP long RIO!!

what do you think NH, hungry and others???

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