Wednesday, February 18, 2009

Costello is right on Rio

Despite some silly protestations over at Catallaxy I think Peter Costello is quite right to oppose the deal by Chinalco to purchase key Rio Tinto assets.  BHP-Billiton, for a time, valued Rio Tinto shares at somewhere north of 3.4 times the value of BHP-Billiton script.  They are now trading at about 1.6 times a BHP-Billiton share.  There are two observations consistent with these findings. First, that BHP-Billiton vastly overvalued RioTinto stock because it ignored the boom-inflated valuation placed on Rio's disasterous move into Alcan - so much so that, on this basis at least, the whole BHP-Billiton board should be sacked.  (The Rio board should unequivocally be sacked for rejecting the BHP-Billiton offer!). If Rio had accepted the BHP-Billiton offer the latter would have lost about $100 billion in market value by now.  Second - and this is only a partially contrary view - is that, while things were good, BHP-Billiton would have enjoyed unparalleled and enhanced monopoly power were it to consummate a marriage with Rio and that this alone was worth a vast premium.  Both views have an element of sense.

Australia will be a major resource supplier to China for the indefinite future. The assets Rio is seeking to flog to the Chinese provide a sale in Rio's interest but not in the interests of Australians since this sale will reduce Australian price-setting power in these markets.  The counterargument that Australian interests have incentives to bid a premium for Rio is logically correct (the existence of a global deadweight loss means the Chinese consumers lose more than Australians gain) but is misleading given the liquidity-constrained Australian capital market environment and the existence of bottom feeding Chinese carnivores supported by their state funding.  Furthermore assets are not trading currently at their value.

Look at Futuris which yesterday sold 19.9% of the Australian Agricultural Company for $1-70 a share when the asset backing of AAC is more like $2-74.  Futuris needed the dough presumably to remain solvent.  It is a bottom-feeding bonanza out there.  Sometimes one cannot prevent national interest losses - othertimes one can.

Keep crucial Australian assets that have the potential to yield excess returns for 100 years out of the hands of those who will consume these assets.  This isn't protectionism as some in the blogosphere contend. It arises because a country with monopoly power in trading certain resources does not wish to sell the assets giving rise to these resources for a song at an all time trough in the business cycle to those whose interest it is to destroy Australian price-setting power.  Stop the sale.


Anonymous said...

So what you are saying Harry is that it is OK if our monopolies rip people off as long they are foreigners.

You sound just like a conniving French beureaucrat.

I don't really disagree but don't forget the high price we charge the Chinese for iron ore comes back as a high price for the things they make and we buy.

hc said...


Anonymous said...

So Chinese work hard, save their pennies and are now in a position to swoop on some overgeared and troubled assets and we should put up the stop sign eh? Really, they should be rewarded for some good old fashioned, honest conservative values there Harry. However they, Rio, BHP shareholders, or anyone else shouldn't be allowed to transfer price nor abscond with any social dividend we duly decide is the responsibility for the rights to private property ownership. That couldn't happen if we ditched income and company tax for carbon and resource taxing instead. Then we couldn't care less who owned the extraction rights. One more nail in the coffin of income tax and that's the bigger picture here.

Anonymous said...

You don't want to be beguiled by that leftist control freak Bob Brown Harry. He like Rudd and Co want to flog off emission rights to all and sundry beyond our jurisdictional grasp and now they're bitching about losing some social and jurisdictional property rights here. Some sensible redesign of our constitutional marketplace would keep the lot of them in their place without impacting overall freedom for all.

Anonymous said...


It's best to argue this from a shareholder perspective.

large Rio shareholders are more than happy to participate in a rights issue instead of being diluted.

that's twice the board ought to be sacked.

Anonymous said...

It's good to see the Chinese government slush fund finally trying to get some decent assets. I guess the interesting thing in the long term will be whether they go for oversupply rather than profits, which surely must be good for China.

Anonymous said...

So assets are not trading currently at their value Harry - that is, value is something other than the price someone is willing to pay for a good. I never thought you'd be spruiking Marxist nostrums :-)

I agree totally with your call for the heads of the Rio board - they have clearly made a string of dreadful decisions. But what's the alternative to the Chinese bid - allowing Rio to go bust? That would leave us back at firesale prices for the tangible assets which the Chinese would pick up even cheaper.

hc said...

Actually Derrida you may have a point - it turns out this morning that my position is alligned with the claims of the AWU.

The union has it right in thinking that jobs are vmore likely to be cut if the deal with Chinalco doesn't go through.

Anonymous said...

So far the Rio board has (i) paid way too much for Alcan (ii) spurned BHP's ridiculously high offer (iii) attempted to dilute shareholders with a deal that will give its major customer a big say in the running of the company. It's not hard to imagine the Chinese government's appointees to the Rio board trying get the management to sell their products at a low price.

So the existing Rio shareholders will be screwed twice. Once by having a smaller share of the profit. And again because the profit itself will be lower.

And why is the Rio board doing this? Out of spite to keep BHP from getting its hands on the assets at a low price - assets that the Board could have sold to BHP at a high price, but for their ego. There was no way those supercilious Poms who run Rio were going to sell to a bunch of upstart colonials.

It's about time an enterprising class action lawyer took the long handle to the Rio board.

Anonymous said...

UBS thinks/believes they have the cash (RIO) to start paying back the loan.

what's wrong with another firm like BHP buying the assets at fire sale prices if that were to happen?

It's not as though the " value" of those assets disappears. They simply get transferred from one set of shareholders to another.

Anonymous said...

You want the state to step in and interfere with the market Harry?

I never figured you as an unresolved warlord.