Strong demand for Rio rights

SYDNEY/LONDON (Reuters) - Rio Tinto (RIO.AX) (RIO.L) said the British leg of its $15.2 billion (9.3 billion pounds) rights issue had been successfully completed, putting the world's top iron ore miner back in growth mode after slashing its debt.

A 97 percent take-up by investors in London of the heavily discounted rights issue, the second biggest non-financial deal ever, suggested faith in dual-listed Rio has been restored after recent distractions including a hostile takeover approach and soured ties with China, its biggest shareholder.

The remaining 15.9 million Rio Tinto shares -- the "rump" -- were sold on Thursday at 2,100 pence, a 2,7 percent discount to Wednesday's close.

With world stock markets falling after U.S. jobs data, Rio's London shares were down 6.1 percent to 2,027 pence by 3:20 p.m., to be one of the weakest British blue-chip stocks. Its Australian shares closed up 0.3 percent at A$51.75.

With $14.8 billion net proceeds in the bank, Rio can comfortably cover $8.9 billion of debt that needs to be repaid in August and further liabilities in 2010.

But analysts said the mining giant still needs to sell non-core assets to pay down the $38 billion debt it took on to buy Canadian aluminium maker Alcan in 2007.

"It's more like getting back to business," said Mark Daniels, equities director at Aberdeen Asset Management, who oversees A$1.2 billion (584 million pounds) including Rio stock. Aberdeen's Australian fund fully subscribed to the offer.

"It's now about getting the most out of their assets," he said, noting Rio's relatively high exposure to aluminium was a drag. If somebody would like to buy those assets, and offer a reasonable price, then they'd be happy to divest," he said.

The Alcan buy pushed up aluminium's contribution to Rio's underlying profit to about 12 percent, double that of rival BHP Billiton (BHP.AX) (BLT.L).

Australian packaging group Amcor (AMC.AX) is in talks with Rio to buy part of Alcan's packaging business, which could bring in $1.5 billion, Deutsche Bank estimated.

Rio raised 7.34 billion pounds before expenses from the British tranche, more than a fifth of the market value of Rio's London-listed shares.

Results of the Australian offer -- 150 million shares at A$28.29 -- were not yet available, but a banking source said take-up was likely to be similar and any Australian rump would be placed Friday morning.

Banks underwriting the two legs of the rights issue were paid a 2.75 percent fee, or around $420 million in total.

ASSET SALES

"They still have a fair bit of debt they need to work through. So I think they will be still be keen to be pursuing non-core asset sales," said Ross Barker, managing director of Australian Foundation Investment Co, which manages about A$3.5 billion including Rio shares.

Barker said the strong bidding also reflected the attractive offer price, and "confirms our view that shareholders were wanting to participate in Rio's recapitalisation to get through with the issues that it had with the Alcan purchase."

Barker's fund was among those Rio shareholders who agitated earlier this year against a planned $19.5 billion tie-up with China's state-owned Chinalco ALUMI.UL.

Chinalco, Rio's top shareholder, took up its full entitlement in a sign it is far from severing ties with Rio.

Relations between Rio and the Chinese group soured last month after the miner called off a bigger equity partnership and opted instead for the rights issue and an iron ore joint venture with BHP, prompting China's state media to brand Rio as a "dishonourable woman."

Chinalco owns about 9 percent of the combined dual-listed Rio Tinto group and would have spent $1.5 billion to take up all its rights.

"I'd see this as more of a financial investment (by Chinalco) than a strategic investment," said Barry He, analyst at Morgan Stanley in Hong Kong. "They don't have operational linkages so far."

"In terms of the benefits they could get for the investment, Chinalco could potentially buy raw materials from Rio, since they produce aluminium. But we haven't seen this happening yet."

Rio's gearing is expected to drop to about 37 percent after the rights offer from 61 percent, analysts estimate. Rio's market value has slumped 64 percent in little over a year, partly due to the debt-funded Alcan buy.

"People still view Rio as having very good assets, and don't want to be diluted. But you'd want the board to be considering what it was that led up to the Alcan purchase and try and improve the processes so that sort of thing doesn't happen again," Barker said.

Rio offered 21 new shares for every 40 held, priced at a steeply discounted A$28.29 per Sydney-listed share and 1,400 pence per London-listed share.

The banks on the deal were Credit Suisse (CSGN.VX), J.P. Morgan Cazenove (JPM.N), Macquarie (MQG.AX), Deutsche Bank (DBKGn.DE), Morgan Stanley (MS.N), RBS (RBS.L) and Societe Generale (SOGN.PA).

(Additional reporting by Sui-lee Wee in Hong Kong; Editing by Ian Geoghegan and Dan Lalor)