Financial News

LONDON (ShareCast) - Rio Tinto (LSE: RIO.L - news) shares soared as it scrapped its controversial $19.5bn refinancing deal with Chinese firm Chinalco and instead launched a $15.2bn rights issue and a merger of its West Australia iron ore assets with those of bitter rival BHP Billiton (LSE: BLT.L - news) .

Institutional investors angry at the Chinalco agreement welcomed the decision, though it raises questions on the future of chief executive Tom Albanese, who was a strong backer of the Chinalco plan.

"We were surprised that the Chinalco deal was foisted on us as the only option," Duncan Seddon, a representative from Australian Shareholders' Association, told the FT.

Rumours that the Chinalco deal was in trouble has been circulating for weeks as commodity prices recovered strongly. There were also doubts that the Australian government would not sanction the deal on fears it would give the Chinese too much influence in setting the prices of key metals. The deal would have seen Chinalco get two seats on Rio's board.

Chinalco expressed disappointment that the deal had been scrapped, adding that it would monitor the iron ore venture between Rio and BHP Billiton, a failed bidder for Rio, very carefully. Terms of the rights are 21 New Rio Tinto plc Shares for every 40 existing shares at 1,400 pence per share, a 48% discount, and 21 New Rio Tinto Limited Shares offered for every 40 existing shares at A$28.29 each.

Rio said the cash call would enable it to meet its Alcan (AL.TO - news) facility debt repayment obligations fully in 2009 and substantially in 2010. As a result, net debt will be reduced to approximately $23.2bn; exceeding the commitment made in December 2008 to reduce net debt by $10bn by the end of 2009.

As part of the iron ore deal, BHP Billiton will also pay Rio $5.8bn to equalise the value of the assets being placed intothe venture. It will now run on a 50:50 basis.

Rio Tinto will also pay Chinalco an agreed break fee of $195m because of the termination of the agreement.

"Since we announced the Chinalco transaction in early February, financial markets have seen a significant improvement. This has had two consequences - firstly, the financial terms of the Chinalco transaction became markedly less valuable and, secondly our ability to raise a level of equity appropriate for our needs on attractive terms has improved very considerably," Rio chairman Jan Du Plessis said.

The group also announced its results for the three months to March with pre-tax profit slumping to $2,433m from $4,169m before on gross sales that fell to $9,538m from $13,236m.