Rio’s Albanese Gets ‘Last Chance’ With China Bailout

April 15 (Bloomberg) -- Tom Albanese’s proposed bailout of Rio Tinto Group by Aluminum Corp. of China may be his last chance to hold on as chief executive officer.

He’s having trouble convincing shareholders and regulators that the $19.5 billion cash injection, which includes the sale of stakes in some assets and a convertible bond issue, is the best way to slash Rio’s $38.9 billion of debt. Rio shareholders will meet today in London to vote on proposals including the appointment of directors and their remuneration.

Albanese and Rio, the world’s third-biggest mining company, are under attack from Australian politicians because the plan would hand partial ownership of some mines and plants to a state-owned Chinese firm. Rio’s No. 3 shareholder is calling for an alternate proposal. The 51-year-old CEO angered investors with the acquisition of Alcan Inc., which caused Rio’s debt to balloon 19-fold in 2007, and his decision to spurn an offer worth as much as $194 billion from BHP Billiton Ltd. last year.

“This would have to be Tom Albanese’s last chance,” said John Wong, a fund manager with CQS UK LLP in London, who doesn’t own Rio shares. CQS manages the New City Natural Resources Fund. “I am surprised management has stayed as long as they have. They really haven’t done a good job for shareholders.”

When London-based Rio unveiled the Chinalco accord on Feb. 12, Albanese described it as “the best financial solution” to reduce debt. Rio already has plans to cut spending by half, sell more assets and fire 14,000 workers to lower borrowings by $10 billion this year. Rio must repay $8.9 billion of Alcan-related debt this year and $10 billion in 2010.

‘Best Solution’

“Chinalco was the best solution for the company and that remains the case,” said Christina Mills, a spokeswoman for Rio in London. Albanese, who was raised in New Jersey and studied mining at the University of Alaska before joining Rio in 1993, has the “full support of the board,” Mills said.

The cost of insuring against Rio defaulting on its five- year bonds increased 2.1 percent since the agreement was announced. The credit default swaps more than quadrupled in the past year to 620.3 basis points as of April 13. Rio shares have lost 57 percent in the past year and closed at 2,500 pence in London yesterday. The Bloomberg Europe Metals & Mining Index, which includes Rio and 12 other companies, dropped 55 percent in the same period.

Bond Markets

Rio sold $3.5 billion of debt for capital management and refinancing, the company said today in a statement to the Australian stock exchange. “With the bond markets open for business, it makes sense for us to take advantage of the opportunity,” Chief Financial Officer Guy Elliott said.

Legal & General Group Plc, Rio’s third-largest investor, with 4.6 percent of the stock, in February called for an alternative proposal that could be considered by all shareholders. The Association of British Insurers, representing 400 institutional investors, said it was “deeply concerned” by the deal because it ignored shareholders apart from Chinalco.

Beijing-based Chinalco, the country’s largest aluminum producer, is Rio’s biggest shareholder. The conversion of the bonds would double its stake to 18 percent.

A boardroom disagreement over the issue led to the resignation of Chairman-Elect Jim Leng in February, forcing Paul Skinner to stay on longer than planned. Jan du Plessis, who joined Rio in September as a non-executive director, will become chairman on April 20.

Australian Approval

Rio still needs approval from investors and Australia’s Foreign Investment Review Board. The FIRB last month rejected a A$2.6 billion ($1.9 billion) bid from China’s state-owned China Minmetals Corp. for zinc producer OZ Minerals Ltd. because the deal includes a mine in South Australia located close to a weapons-testing site. The proposed Chinalco transaction triggered a Senate inquiry into foreign ownership rules.

“A failed deal is more seismic than implying just a funding shortfall,” said Michael Rawlinson, head of mining and energy at brokerage Liberum Capital Ltd. in London. “The board’s preferred strategy would be in tatters, leaving it in a very vulnerable position.”

The biggest acquisition by Albanese’s predecessor Leigh Clifford was the A$3 billion purchase of Australian iron ore producer North Ltd. in 2000. In contrast, after less than three months as CEO, Albanese sanctioned Rio buying Alcan for $38.1 billion, its biggest-ever acquisition.

“Rio had a reputation as being fairly conservative and less nimble in M&A,” said Nick Hatch, an analyst at ING Groep NV in London who has a “hold” recommendation on the stock.

‘Grave Errors’

At the time of the Alcan bid, aluminum prices had doubled over the course of a five-year rally. Since trading at a record in July last year, the metal has plunged 54 percent on the London Metal Exchange. As much as 70 percent of the global aluminum industry is unprofitable, Svein Richard Brandtzaeg, CEO of Norwegian producer Norsk Hydro ASA, said last month.

“Management have made two grave and fundamental errors in the Alcan deal and then pushing away the BHP offer,” said Frank Lucas, a director of London-based fund manager and advisor Loeb Aron & Co., which holds Rio shares. “They put their own jobs before the interests of shareholders.”

As a result of those decisions, Albanese and Rio are “selling off their crown jewels at the bottom of the market to get themselves out of trouble,” CQS’s Wong said.

Door Open

Still, Rio has left the door open to other options. CFO Elliott said last month Rio had a “Plan B” should shareholders or regulators reject the Chinalco proposal. Rio would consider selling shares, bonds or more assets. It would also look at rescheduling debt, or a combination of the four options, he said.

Rio has a contingency plan for an $8 billion share sale in case the Chinalco deal falls through, the Sunday Times said April 5.

The accord with Chinalco “offers around double the amount we could raise from a rights issue, significant premia, strategic benefits and stability for potentially two years of uncertain economic conditions,” Rio spokeswoman Mills said.

A rights offer combined with a rapid round of asset sales would have found favor among investors, said Ian Henderson, who manages $7 billion in natural-resource assets including Rio shares at JPMorgan Chase & Co.’s asset-management unit in London.

“Many investors would have preferred a rights issue, but they were not given the choice,” Henderson said. “The Chinalco deal is less palatable because if you own Rio Tinto it’s because you want to own the mines, not have portions of them sold off.”