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Bidders Circle Riversdale, But Obstacles Remain

20 December, 2010

News of Rio Tinto’s potential bid for Africa-focused Riversdale has left global mining giants considering similar bids to tap into the Australia-listed firm’s attractive Mozambique coal assets.

ArcelorMittal and Xstrata are “very interested” in Riversdale, while Anglo American is also taking a look, three sources with knowledge of the situation said.

Five state-run Indian firms have confirmed they were considering an offer, attracted to Riversdale’s formidable coal assets, though no formal approaches have been made so far.

Brazil’s Vale, which had been tipped as a prime candidate to buy the asset, may be deterred by friction with Riversdale shareholders, pressure from Brazil’s government to invest at home, and potential opposition from Mozambique’s government.

Mozambique is seen as a key supplier of coal in the coming years given its large reserves of thermal coking coal that has relatively low costs and is well situated to serve China’s booming market.

Analysts say Riversdale may eventually supply 5-10 percent of the global market for the key steel-making material.

Rio and its advisors Macquarie are said to be outraged that its interest in Riversdale has gone public so early, pushing up the stock price and potentially sparking a bidding war before they were ready to formalize a bid.

Riversdale’s biggest shareholder is India’s Tata Steel, with a 24 percent stake. Brazilian steelmaker CSN and U.S. investment firm Passport Capital are also major shareholders.

VALE ADVANTAGES, ROADBLOCKS

Vale, the world’s top iron ore producer, has built up an extensive logistics network in the region and would benefit from a massive boost in its reserves of coal. It has identified coal, along with copper and fertilizers, as a key area of expansion as its seeks to diversify its business.

“It makes a lot of sense (for Vale to bid for Riversdale),” said Xavier Prevost, an independent analyst at XMP Consulting who formerly worked as a mining official with South Africa’s government. “If Vale goes for Riversdale, then they would have most of Mozambique, all the best parts of it.”

Vale declined to comment on the issue.

The firm this year bought into firms that control hundreds of miles of rail lines in Mozambique and neighboring Malawi for its $1.7 billion Moatize coal mine — where reserves are only around 10 percent of those at Riversdale’s Zambeze project.

Neither Rio Tinto nor Riversdale have significant infrastructure in the area. With heavy upfront investments in logistics lowering the margins on the Moatize project, Vale could boost returns by taking control of Zambeze.

But the shareholder mix makes the takeover a complex one.

Tata, which has said it views its Riversdale stake as a strategic asset, could also step in with an offer, while an Indian consortium which includes Steel Authority of India and power producer NTPC said it would decide by the end of December whether to bid.

One of Vale’s problems is that it may face harsh criticism from the Brazilian government, which frequently pressures Vale to invest at home.

Vale could also face heavy resistance from CSN, which became part owner of Vale when the iron miner was privatized in 1997 but has had a thorny relationship with Vale for a decade.

According to one analyst who spoke off the record, Vale’s CEO Roger Agnelli and CSN Chief Executive Benjamin Steinbruch fell out over the direction of the iron miner, leading to an acrimonious exit of CSN from the company and creating bad blood between the two companies.

“You know they don’t love each other, right?” the analyst said. “I don’t see Vale being a partner with CSN anywhere, and I don’t see CSN reaching an agreement to sell shares to Vale.”

Mozambique could also block a potential Vale takeover of such a major coal asset.

Obete Matine, the country’s deputy national director of mineral resources, told Reuters the government wants to see more foreign firms exploring coal assets to boost state revenues.

He declined to comment on whether the government would be opposed to a single company controlling most of its coal assets.


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Bidders Circle Riversdale, But Obstacles Remain

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