Rio Tinto Plc’s interest in acquiring Riversdale Mining Ltd has led to speculation that Tata Steel Ltd may wish to increase its stake further in the Australian mining company. Rio Tinto had indicated to the Riversdale management its willingness to pay Australian $15 (Rs 672 today) a share. Though nothing came of that offer, Riversdale’s share price has already crossed A$16, as the company is now being seen as an acquisition candidate. Its market capitalization has reached A$3.8 billion.
Tata Steel’s interest in the company is to secure a portion of coal supplies for its steel-making operations, in Europe initially and later in India, too. It owns about 24% of Riversdale’s equity (as per a Riversdale disclosure dated 27 October), with CSN Europe Limitada (a Brazilian steel maker) and hedge fund Passport Capital owning about 16% each.
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Riversdale is undertaking exploration and mining projects for anthracite in South Africa and coal in Mozambique.
Since Riversdale required capital for mine exploration and development, it had set up a joint venture with Tata Steel in 2007 for the Benga coal mining project in Mozambique. Tata Steel picked up a 35% stake, and as a result it can buy 40% of the coking coal extracted from these mines. Subsequently, the Indian steel company picked up an equity stake in Riversdale as well.
Tata Steel’s plants in Europe (Corus) procure their entire coal requirement from the market. But that thinking has changed and global steel players are building up captive sources of coal to hedge against price and supply volatility. Tata Steel, too, intends to ship coal from the Benga coal mine to its European plants initially and then to India, when its new projects come on stream.
But Tata Steel’s motivation to outbid Rio Tinto (or even other mining giants who may join the fray) may be relatively low. It may not be very interested in acquiring a large coal mining business. Riversdale’s total capacity would exceed Tata Steel’s own coal requirements and it would end up having an exposure to the coal business. It would not want its desire to secure coal supplies to lead to a large exposure to the coal commodity cycle in addition to steel. That would mean that when coal prices drop, profit of its steel business may improve, but lower profits in the coal business may drag down margins.
And if it was interested, it could have hiked its stake earlier, and at a much lower cost. Riversdale’s shares traded at only about A$6 a year ago. In addition, it has a sizeable capital expenditure programme for its forthcoming steel projects, making resources scare.
And, Tata Steel would have been aware of the possibility of Riversdale getting acquired, since mining companies with established reserves are prized assets. It would have inserted sufficient safeguards in the joint venture agreement, to protect its interests, in the event of a change of control. There have been reports of a consortium being formed, with like-minded Indian companies to put up a counter-bid, a proposal which looks good only on paper. Tata Steel’s best bet is to have safeguards to ensure that irrespective of who controls Riversdale, its coal offtake agreements remain unaffected.
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