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Rio Rebuffs BHP, Outlines Growth Plans

Rio Tinto will spend $2.4 billion on new mines, raise its dividend and generate billions of dollars from asset sales as it seeks to fend off a $120 billion takeover proposal from larger rival BHP Billiton.

Rio Tinto
Rio Tinto

"While BHP may need Rio Tinto, Rio Tinto doesn't necessarily need BHP," Rio Chief Executive Tom Albanese told a media teleconference from London on Monday.

"We believe that the value in Rio Tinto is yet to be fully reflected by the market. We have the people, execution capability and resources to work smarter, faster and better than our competitors."

BHP made public on Nov. 8 its plan to take over Rio and forge a mega-mining group with a market capitalization of around $350 billion and control of much of the world's iron ore, copper and aluminum.

Albanese reaffirmed that he thought BHP's bid fundamentally undervalued Rio, which he said was better placed to deliver value as a stand-alone firm.

"It's fair to say that every conversation I've had, is they (Rio shareholders) are happy to reject the proposal," he told a London news conference following a presentation.

Albanese said that with two new iron ore mines in Australia, total production should double to around 430 million tons by 2018. Rio would also shoulder more than half the cost of a more than half a billion dollar diamond mine expansion in Canada.

"It's very clear that one of their key strategies is to pump up the iron ore volume as much as possible, which increases the competition issues," said an analyst in Johannesburg who declined to be named.

BHP has said it expected close scrutiny by regulators of any takeover, which would give the combined firm around a third of the seaborne iron ore trade. Steelmakers in Europe and Asia have said they would oppose any takeover.

Dividend

The company was also raising this year's total dividend by 30 percent, with a further annual total increase of at least 20 percent in each of the following two years.

"The increase in dividend is cash into the shareholders' pockets, that kind of puts pressure on the bidder to offer some cash as part of the deal," the South African analyst added.

Rio increased its target for asset sales by 50 percent to at least $15 billion after a strategic review. The firm said it has identified as much as $30 billion in possible divestments, but it was unlikely all of those units would be sold.

It previously planned to sell off aluminum packaging acquired when it bought Alcan, but it has added to the list Alcan engineered products, the undeveloped Kintyre uranium mine and the Northparkes copper and gold lode, among others.

Rio approved additional funding of $563 million for development of underground mining at its Diavik diamond mine in Canada, bringing the total investment to date to $787 million.

The investment will be funded 60 percent by Rio and 40 percent by venture partner Harry Winston Diamond Corp, Rio said.

Rio shares closed 7.5 percent higher in Australia at A$138, buoyed by a Chinese media report that the country's new sovereign wealth fund, China Investment Corp, may team up with local steelmakers to bid $200 billion for Rio. The fund later denied the report. BHP shares closed up 4.6 percent.

In London trading, Rio gained 0.6 percent while BHP fell 1.4 percent.

The Anglo-Australian miner also said it was not considering turning the tables in a so-called Pac-Man defence which would involve RIO launching its own bid for BHP, as had been reported.

"The first time I heard about Pac-Man was reading about it in the newspaper and it is not something I have given serious consideration," Albanese said.

He also said he had no contact with other potential suitors for the company such as the Chinese. "There's no shortage of people that would want to give us a call, but we have not been engaging," he said.

Since BHP made its intentions known, there has been speculation that Anglo American or Xstrata might step forward with rival offers. Brazil's CVRD ruled itself out on Monday. Its chief executive, Roger Agnelli, said in Paris that CVRD had no intention of buying into Rio Tinto.

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