Rio Tinto: Rio Tinto is taking a small but daring step onto the M&A trail. Its interest in a possible A$3.5 billion ($3.5 billion) bid for Sydney-listed coal miner Riversdale shows it isn't afraid of making speculative investments. But terms which now seem expensive could, in relatively short order, look like a bargain.
Riversdale would give Rio access to billions of tonnes of coal in Mozambique. Its assets in the country are undeveloped, and access is far from easy — relying either on a railway or barges down the Zambezi. In the year to last June, Riversdale scraped together Ebitda of $4 million. This year, it is on course to quadruple that. In 2012, when Riversdale's two largest coal mining assets start production, Ebitda is forecast to hit $111 million. Given that grown up miners trade on Ebitda multiples of between five and 10 times, earnings will have to keep climbing at a pace before the valuation multiple gets anywhere near planet earth.
But the market can see the potential. Rio’s A$15-a-share approach valued the group at only six per cent premium to its market value, and the stock is now trading at a nine per cent premium to Rio's approach amid expectations of competing interest. Vale, Xstrata, Anglo-American, BHP Billiton and Peabody are all credible rival suitors.
The risks aren't confined to Mozambique. Tata, the Indian steel maker, owns 35 per cent of Benga, one of Riversdale's two big prospects. Meanwhile, an offshoot of Wuhan Iron & Steel of China is close to paying $800 million for a 40 per cent stake in Zambeze, Riversdale's other big property. These industrial relationships could be complicated. But such links also show conviction in the value of Riversdale's assets. Assume, roughly, that Zambeze is half the value in Riversdale, and the terms of Wuhan deal would imply the enterprise is worth $4 billion.
The target's need for capital investment will give buyers including Rio the leverage to keep a lid on the purchase price. Meanwhile, large, accessible, long life assets in minerals are rare. In the end, Rio may be lucky if it gets the chance to pay a big price for Riversdale.