Rio Tinto confident its Alcan bid can beat credit crunch

At a time when risk is being repriced and lenders are drying up, Rio Tinto's underwriters are in the market trying to sell US$40 billion of debt into European markets.

The Alcan deal is not conditional on finance and analysts don't believe the credit crunch jeopardizes the offer, but they say it is likely to mean the cost of servicing the huge debt will rise.

"That would impact on earnings and affect valuation in that sense, but it is not going to be a deal-breaker by any means and Rio Tinto has more than ample capacity to handle it," one analyst said.

Rio's loan is underwritten by Royal Bank of Scotland, Deutsche Bank AG, Credit Suisse and Societe Generale, all of which now face the challenging task of finding European buyers for the debt.

State Street Global Advisors' head of fixed income and cash, Stephen Nash, said Rio Tinto would be best to put off the debt raising until the current turbulence has passed.

"In terms of debt pricing, this is not the time to be thinking about a major trade on that sort of scale," he said.

A lack of liquidity is the key to the current crisis, but this will pass, Nash said, and Rio would be prudent to back off and wait.

However, Rio is pressing on with the raising and said Thursday it is progressing well.

"Rio Tinto's debt raising for the Alcan deal is well advanced and running well on plan," a company spokeswoman told Dow Jones Newswires.

Rio chairman Paul Skinner has said the current crisis has sparked a "flight to quality" and that buyers are lining up to act as lender to the mining giant.

"Notwithstanding the turbulence in credit markets recently, there is still a very strong appetite amongst the banks for a lending opportunity to a company like ours," he told reporters after the miner unveiled its half-year result on Aug. 2.

The credit crunch has worsened since then, but Fat Prophets analyst Gavin Wendt said there should still be willing lenders for a company with the kind of strong cashflow Rio's first-tier operations deliver.

"The distinction has to be drawn between the sort of subprime mortgage lending that has gone on in the United States and lending for high-quality resource projects," he said.

"I don't think the banks would have changed their view on lending to Rio Tinto so, at the end of the day, they should be able to get their funding."

Macquarie Equities analyst Brendan Harris said there were some concerns among investors over the impact of the credit crisis on the deal.

"The company is obviously confident in their ability to raise debt, but it is something investors will be focusing on when (chief executive) Tom Albanese is in town," he said.

Rio's offer for Alcan, which would be the biggest takeover yet in a flurry of deals in the global mining sector, is seen as fully priced.

The deal will make the Anglo-Australian mining giant the world's biggest producer of aluminum and bauxite and is predicated on bullish outlook for aluminum demand.

In previous commodity cycles, iron ore and copper have been the first metals to rise in a boom, while aluminum shines later in the cycle, and Rio is betting the latest China-driven boom will be no different.

One analyst said an increase in the cost of the debt for the deal would not shake Rio's faith in its strategy and that its strong cashflows will see it pay down debt rapidly, especially as capital management programs have been suspended.

"If their costs go up a few percentage points, they have so much free cashflow coming out it's really not going to be an earning impediment to the company. They can still go and do all the things they want to do," the analyst said.

-Edited by Matthew Oakley

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