Tata Steel rises on news of Rio’s Riversdale bid

Reports of $3.5-b offer by mining giant kick off speculation that Tatas may launch counter bid for resource-rich co

SHARES of Tata Steel, the country's largest steel company, surged 3.4% on Monday after news that global mining major Rio Tinto had made a $3.5-billion bid for Africa-focused Riversdale Mining, in which the Tatas own a 24% equity stake.
    While the development sparked speculation that Tata Steel, one of the three major shareholders in Riversdale Mining, could launch a counter bid, people familiar with the group said the Mumbai-based conglomerate would not go alone in putting in such a bid.
    Tata Steel, which opened at 620.90 on BSE on Monday, jumped to the day's high of 639.70 after international media reports said Rio was looking at making a bid for Riversdale. The stock later corrected after the market factored in limited gains to Tata Steel, before ending at 634.95, a 3.4% rise over Friday's close.
    The stock rose in early trade after local investors expected the company would cash out. But Tata Steel's statement denied such a possibility. Riversdale Mining is a "valuable strategic investment and (Tata Steel) continues to be interested in developing the tenements of the company. Tata Steel will continue to monitor the situation and will take appropriate action as deemed necessary", it said.
    Analysts tracking the sector also said Tata Steel would continue to retain its interests in Riversdale while also exploring options to team up with a partner for a counter bid, as the company has hard coking-coal projects in Mozambique that could eventually supply 5-10% of the global market for the key steel-making material.
    According to a person connected with the raw material plans of Tata Steel, "Riversdale is vital for Tata Steel as the steel maker is not fully integrated as far as coking coal is concerned. With 30 million tonnes of steel-making capacity, of which 20 million tonnes is outside India where there is no captive coking coal supply, Tata Steel needs to look at all options closely."
    The Tatas have captive iron ore requirements in India while they buy about 40% of their coking coal needs. For their European operations, which include Corus, where they are scheduled to make 16 million tonnes of steel, the Tatas require 9.6 million tonnes of coking coal.
    JPMorgan analysts Pinakin Parekh and Neha Manpurua say the likelihood of a counter offer emerging from somewhere is high. "In our view, the attraction is the resource (coking coal), rather than the project as it stands. As we have pointed out, the key hurdle in project development is infrastructure," they added.
    Indian steel makers have been betting on developing coking coal assets in Africa, as a hedge against Australia, which is the dominant coking coal supplier to Indian firms. The price of coking coal was on Monday settled at $221-225 a tonne for the January-March 2011 contract. Tata Steel Europe buys it from Australia and the US, where it spends $20 a tonne on freight. In comparison, the cost of coal from Mozambique would be about $80 a tonne and the freight cost will be lower than that from Australia.
    Coking coal, which is primarily used by steel makers, has been in demand as higher production fuels the need for more coal. About twothirds of global seaborne trade is from Australia, and Mozambique is steadily becoming the second-largest producer, say industry reports. Riversdale in talks with Rio on A$3.5 b bid Rebecca Keenan MELBOURNE
    RIVERSDALE Mining, an Australian developer of coal mines in Africa, said it held talks with Rio Tinto Group on a potential A$3.5 billion ($3.46 billion) takeover proposal. "The company has had discussions with Rio Tinto concerning a possible transaction at the corporate level for indicative consideration of A$15 per Riversdale share," the Sydney-based developer said today in a statement. Its stock jumped to the highest price in a decade. "We note the statement," Rio Tinto spokeswoman Karen Halbert said by phone on Monday, declining to comment further.
    Coal deals this year have more than doubled after imports by China, the biggest consumer, surged fivefold in 2009. Walter Energy bid C$3.3 billion ($3.28 billion) for Western Coal last month, while Nathaniel Rothschild's Vallar agreed to buy stakes in Indonesia's PT Bumi Resources and BT Berau Coal Energy to build one of the world's largest coal producers.
    Riversdale's coal resources in Mozambique total 13 billion metric tons, split between the $2 billion Zambeze project and the Benga license, ac-cording to the company's website. "Riversdale has very large resources in Mozambique," said Grant Craighead, managing director of Sydney-based research company Stock Resource. "The challenge for Rio is finding assets big enough to make a material difference to the company and this fits that criteria."
    Riversdale rose 16% to A$16.31 at 4:10 pm in Sydney, the highest close since March 2000. Rio dropped 0.5% to 4,392 pence at 11:07 am in London, after retreating 0.5% in Sydney. The proposed bid is a 16% premium to Riversdale's average share price over the 20 days through December 3. The average premium for coal-industry deals announced this year is 26%, according to data compiled by Bloomberg.
    Rio is studying small-to-mediumsized acquisitions that are likely to be in the low "single-digit billion dollar range," chief financial officer Guy Elliott said November 26. A bid for Riversdale fits with the company's mergers and acquisitions strategy, Liberum Capital said on Monday in a note to clients.
    Rio would need to win the support of Riversdale's major holders, including Tata Steel, which holds a 24.16% stake and a 35% interest in the Benga project. Benga may produce about 1.7 million tons a year of coking coal and 300,000 tons of thermal coal, with first exports expected in the second half of next year, according to the company's website. Coking coal is used by steelmakers and thermal coal fuels power plants.
    Rio produced 7.5 million tons of hard coking coal from its operations in Australia's Queensland state in 2009, according to a January 14 statement. The company's production growth in coking coal is estimated by Liberum at 12 percent over the next three years, meaning "this approach would hold strategic merit," the brokerage said.
    Rio, based in London, already has nine thermal coal mines in Australia and the US, one coking coal operation in Australia and two other mines that produce both types. Two thermal mines are under development, according to its website. "While discussions with Rio Tinto are ongoing, there is no certainty that Rio Tinto or any other party will proceed with any proposal," Riversdale said in the statement. — Bloomberg

DIGGING RICH: Drilling in progress at Riversdale Mining's Zambeze project, near Tete in Mozambique