An Iron Deal Worth $2 Billion: Rio Tinto plc (ADR) (RIO), Teck Resources Ltd (USA) (TCK)

Complications and Legal Issues

At this time, there appears to be little standing in the way of this deal. Once Rio Tinto enters into formal negotiations with a specific suitor, more information may become public. Aside from a customary regulatory approval process and a vote by Rio Tinto’s board of directors, the deal will face little formal scrutiny. It is unlikely that the company’s shareholders will be consulted in a binding manner. As such, IOC could be freed from Rio Tinto plc (ADR) (NYSE:RIO)’s grasp by the end of the fourth quarter of 2013.

Long-Term Outlook and Competition

Whether Rio’s IOC stake ends up going to ArcelorMittal, Glencore, Teck Resources Ltd (USA) (NYSE:TCK) or a Chinese steelmaker, Rio will be glad to be rid of an under-performing asset. Unlike some potential suitors for IOC, Rio’s fate does not rest on its ability to produce and refine high-quality iron ore. Compared to many of its gold, copper and coal holdings elsewhere in the world, Rio’s iron reserves offer unattractive margins and fail to give it much of a competitive advantage over other major miners.

By contrast, ArcelorMittal owns a lucrative 15 percent stake in the Quebec Cartier Mining concern. By taking a stake in one of QCM’s regional rivals, Arcelor may be able to create some much-needed synergies in its eastern Canadian iron ore holdings and further increase its competitive advantage over North American steelmakers. For their part, Arcelor’s Chinese competitors may wish to stop their Indian rival from gaining another foothold in Canada’s iron-rich northeastern region. Meanwhile, the IOC stake might help smaller mining concerns like Glencore and Teck Resources Ltd (USA) (NYSE:TCK) compete with multinational players on better terms.

In short, Rio Tinto plc (ADR) (NYSE:RIO)’s sale of its sizable stake in Iron Ore Company of Canada may not produce an immediate arbitrage premium or even much of a short-term bounce for the company’s shareholders. However, it is likely to strengthen its balance sheet in the medium term and provide it with a much-needed cash infusion that could be used to fund a special dividend or buyout. Meanwhile, IOC’s eventual buyer may benefit from regional synergies and create value for its own shareholders. Accordingly, this deal bears close watching.

The article An Iron Deal Worth $2 Billion originally appeared on Fool.com and is written by Mike Thiessen.

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