Rio Tinto Gains Control Of BHP Billiton’s Stake In Richards Bay Minerals

Rio Tinto (NYSE:RIO) has completed its purchase of BHP Billiton’s 37% stake in sand mining and mineral processing company Richards Bay Minerals (RBM) for $1.91 billion. Rio already had a 37% stake in Richards Bay prior to this transaction with BHP Billiton, so Rio’s stake in the company now stands at 74%. Of the remaining interest, Blue Horizon Investments, which is a consortium of local communities and businesses, owns 24%, and Richards Bay Minerals’ permanent employees own 2%. Even prior to purchasing BHP Billiton’s stake, Rio Tinto used to manage RBM’s business and market all of its products. Richards Bay produces titanium minerals, high purity pig iron, rutile and zircon as well as space age metals. It is located north of Richards Bay in Zululand in the South African province of KwaZulu-Natal. ((Rio Tinto completes acquisition of BHP Billiton’s interests in Richards Bay Minerals, Rio Tinto))

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The Acquisition

The acquisition was triggered on February 1, 2012, by BHP Billiton exercising a put option agreed to with Rio Tinto as part of Richards Bay’s restructuring in 2009. The price was determined through a previously agreed upon expert valuation process. The actual purchase price paid by Rio Tinto upon completion of the acquisition is $1.7 billion. The acquisition price was $1.9 billion before contractual adjustments for cash payments made by RBM to BHP Billiton since the effective transaction date of February 1, 2012. This price of $1.9 billion includes $0.6 billion for BHP Billiton’s 37% equity interest in RBM, $1.0 billion for a 50% interest in outstanding RBM shareholder financing arrangements, and $0.3 billion for a royalty stream.

Significance Of Richards Bay For Rio

The importance of Richards Bay for Rio Tinto lies in its titanium feedstock reserves. Titanium dioxide is used in diverse products, from sunscreens to food colorings. In 2011, RBM had a 14% share in global sales of titanium dioxide feedstock, according to Rio Tinto. We believe that the long-term demand outlook for titanium dioxide is robust and, therefore, the demand for its feedstock is expected to grow strongly. Moreover, RBM is  one of the world’s lowest cost producers and has mineral resources to support 20 years of production. So, we believe that RBM is a first-class asset for Rio to have in its portfolio and doubling its stake only makes it stronger. RBM also has an 18% share of global zircon sales. ((BHP Billiton sells RBM stake for $1.9 bn, AFP))

RBM’s revenues for 2011 were $1.2 billion, with 41% of them generated from the sale of feedstocks.

Diamonds and Minerals account for only 4% of Rio Tinto’s Trefis price estimate. Hence, we believe that increased revenues from Richards Bay will not have any material impact on Rio’s valuation.

We recently revised the Trefis price estimate for Rio to $45 which is nearly 5% below its market price.

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