MELBOURNE Miner Rio Tinto (RIO.AX) (RIO.L) made a $3.5 billion bid approach for Africa-focused Riversdale Mining RIV.AX, sending the target firm's shares surging 16 percent and setting up a potential takeover battle.
Rio's move on Australia's Riversdale is likely to spark a bidding war, as the company has hard coking-coal projects in Mozambique that could eventually supply 5-10 percent of the global market for the key steel-making material.
Brazil's Vale (VALE5.SA) is seen by some analysts as the most likely rival bidder, as it already has coal mines nearby in Mozambique. India's Tata Steel (TISC.BO), Riversdale's top shareholder, was also seen as a potential bidder.
Tata said it regarded its Riversdale stake as a strategic investment. "Tata Steel will continue to monitor the situation and will take appropriate action as deemed necessary," the company said.
Xstrata XTA.L, Anglo American (AAL.L) and Peabody Energy (BTU.N) could also be interested. Top coking-coal exporter BHP Billiton (BHP.AX) (BLT.L) is seen as a less likely contender, as it has its own growth options in Australia.
Xstrata and Anglo declined to comment.
The company's fourth-biggest shareholder, Australian investment firm LinQ Management, expects Riversdale to be hotly contested, given the scarcity of good quality coking-coal assets and booming demand from China and India for the commodity.
"It's in a good part of the world for accessibility, and we think there's plenty of further upside for whoever's interested in buying it. Hopefully there will be other interested suitors coming to the table," LinQ Managing Director Clive Donner said.
Riversdale confirmed media reports that Rio was talking about an offer around A$15 a share for Riversdale, which would value the group at A$3.5 billion ($3.48 billion), only a 6 percent premium on Riversdale's close on December 3 ahead of a leak to a UK newspaper. Riversdale hinted it was talking to others.
"While discussions with Rio Tinto are ongoing, there is no certainty that Rio Tinto or any other party will proceed with any proposal for the acquisition of Riversdale," it said.
Riverdale's shares hit a high of A$16.41 on Monday, its biggest one-day gain in more than two years. They ended up 15.7 percent at A$16.31.
Anglo-Australian Rio confirmed it was in talks and that it had told Riversdale it was not currently in a position to submit a formal bid for the company.
"Hence nothing is on the table," a Rio spokesman told Reuters in an email. "Discussions are incomplete."
UBS UBSN.VX is advising Riversdale and Macquarie (MQG.AX) is advising Rio Tinto.
SEEKING MID-SIZED TAKEOVERS
A deal would mark Rio Tinto's first significant acquisition since its badly timed $38 billion takeover of Alcan at the height of the commodities boom in 2007, which forced it to sell more than $13 billion worth of assets to help slash debt.
It salvaged its balance sheet last year with a $15 billion rights offer after scrapping a planned $19.5 billion investment by its biggest shareholder, China's Chinalco. That deal was replaced by a planned iron ore joint venture with BHP Billiton (BLT.L), which fell apart in October after regulators objected.
Rio said last week it was hunting for small to medium-sized acquisitions worth around low-single-digit billions of dollars.
Rio would need to pay well over A$3.5 billion to win support from Riverdale's three major owners: Tata Steel, steelmaker CSN (CSNA3.SA) (SID.N) of Brazil and U.S. hedge fund Passport Capital, who together own more than half the firm, analysts said.
"Not only will they have to pay a big premium for it, but there are likely to be other bidders," said CLSA analyst Hayden Bairstow, who has a price target of A$17.50 a share on Riversdale.
Rio's decision to make a tilt for the mid-sized miner, despite its complex ownership, not only underscores its hunger for scarce quality coking coal assets, but also marks a tacit recognition that Mozambique may be the new frontier for coking coal.
Analyst Charles Kernot at Evolution Securities in London said the tentative price for Riversdale worked out to about 30 cents a metric ton of coal resources, while Rio just agreed to sell South African coal assets for 7.5 cents a metric ton.
"Rio Tinto's reported interest (in Riversdale)... appears to us to make little commercial logic -- particularly as Riversdale also has infrastructural challenges in Mozambique," he said.
Riversdale's Zambeze project holds 9 billion metric tons of certified resources, one of the largest undeveloped coking coal resources in the world. It also owns 65 percent of the neighboring Benga project.
The company is in the midst of completing an agreement to give China's Wuhan Iron & Steel Corp 600005.SS an 8 percent stake in the company and a 40 percent stake in the Zambeze project, another potential hurdle for Rio Tinto. Wuhan was not immediately available for comment.
Rio shares in London rose 0.4 percent to 4434 pence by 1240 GMT, compared with a 0.6 percent increase in the British mining index .FTNMX1770. Its 5-year credit default swaps were trading steady at 89/94 basis points, as a takeover of Riversdale was seen as easily affordable.
(Additional reporting by Fayen Wong in Shanghai, Umesh Desai in Hong Kong, Eric Onstad in London and Prashant Mehra in Mumbai; Editing by Muralikumar Anantharaman, Jon Loades-Carter and Erica Billingham)