BREAKFAST DEALS: Rio's risk

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Rio Tinto is now getting attacked for sedition by Guinea's military junta, while Chinalco gets friendly with WA's Colin Barnett. Meanwhile, what's going on at Macquarie and might NAB wish to buy Islamic banks in the Middle East?

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Rio Tinto

The arrest of four employees including chief iron ore negotiator Stern Hu in Shanghai is not the only problem for Rio Tinto. The Anglo-Australian mining giant has now effectively been accused of sedition by the government of Guinea, in West Africa, which came to power late last year in a military coup d'état. In a letter to Rio, the country's minister for mines Mahmoud Thiam said the company had "come dangerously close to destabilising civil peace”. Rio had been seeking to regain the permits Guinea took away for Rio's Simandou iron ore project, which Rio has spent $US500 million on and will cost a total of $US6 billion to develop. The licences had been given to the relatively obscure BSG Resources, owned by Israeli diamond mogul Beny Steinmetz. The billionaire's family company – which has natural resources interests across bad parts of Africa and real estate across good parts of Europe – is also one of De Beers' biggest customers for rough diamonds. He also has interests in construction. Despite being a veteran of the Israeli army, Steinmetz recently partnered with the ruling family of Dubai to look at building a six-star hotel on the Adriatic coast of Montenegro. His property development company is called "Scorpio Real Estate”. We're not making this up. For its part, Rio says it has acted in good faith as it meanwhile agrees to remove its equipment from the permits awarded to Steinmetz. If Simandou doesn't end up just being another ugly symbol of African governance it could become one of the world's biggest sources of iron ore.

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Chinalco

We don't know if there's a Chinese word for Schadenfreude, but in any case, Chinalco's president Xiong Weiping is probably too busy to notice the misfortune the "dishonourable woman" Rio Tinto is having in Guinea, speaking with Colin Barnett and all. Following a meeting with the Western Australian premier, Xiong told the audience at a business conference in Beijing that Chinalco would actively look at projects in WA. For his part, Barnett reiterated that, like Chinalco, he was against the Rio-BHP Billiton iron ore merger in the Pilbara, which will deliver the state less tax revenue. Then again, Barnett has also said he would consider support if the two companies moved their main offices to Perth. Last year Perth mayor Lisa Scaffaldi told a meeting of fellow councillors that BHP would move its headquarters to a new building at 125 St Georges Terrace in 2012. The claim, much to the relief of the company's Melbourne-based personnel, was subsequently downplayed by both the mayor's office and denied by BHP. Perhaps if BHP doesn't move all its staff there, there will be room for a reinvigorated branch of Chinalco.

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Iron ore negotiations

Beyond Rio Tinto's decision to scrap a deal with Chinalco and forge its Pilbara iron ore operations with BHP Billiton instead, the main beef that China has had with the global miner is to do with the pricing of iron ore. But while the "Rio Four” continue to languish in prison without being charged and while the China Iron & Steel Association (CISA) continues to seek a better deal on iron ore prices, spot prices are fast approaching $US100 a tonne. Several analysts in London are now in fact forecasting that benchmark prices will rise next year too, the Financial Times says. Ironically, the rise in prices is due to Chinese stockpiling on expectation of rising prices, but at least leading steelmakers appear to be aware of that. "It's impossible for China to accept the 33 per cent price (discount that Europe and Japan obtained)," Hunan Valin Iron & Steel chairman and CISA vice-chairman Li Xiaowei told Dow Jones reporters. "Supply and demand rely on each other like teeth and lips. Those who only chase monopoly and windfalls will eventually lose more.” Such a mouthful suggests two things: China will accept steeper prices than other importers (as opposed to cheaper prices), but will seek revenge on the spot price trade. After being hit with an egg, China has to regain its face.

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Macquarie Group and Macquarie Airports

Another Macquarie Group satellite looks set to be privatised, sold or internalised, after Macquarie Airports entered a trading halt yesterday afternoon pending a "significant announcement regarding strategic options to enhance security holder value.” The halt came after MAp shares already rose 10.46 per cent, indicating that something had already leaked. Interestingly, Macquarie Group itself didn't halt until an hour later, giving ample time for traders to have a bite of the silver doughnut and send its shares some 5 per cent higher. Macquarie Infrastructure Group has also been doing strange things, with a 13 per cent price rise on Wednesday for no apparent reason. On July 8, MIG also said was it was looking into options to "enhance security holder value,” but no halt was made. Back to MAp, a value enhancing move is most likely to be in the form of a takeover, à la Macquarie Communications Infrastructure Group, sold to the Canada Pension Plan Investment Board. A management internalisation, à la Macquarie Leisure Trust Group, would probably not solve the problem of MAp's 50 per cent discount to net asset backing, but then again there is talk that Macquarie could sell its lucrative income steam for some $300 million. The announced deal might involve a bit of both approaches: the sale of assets into an unlisted Macquarie trust or to an external bidder, and the internalisation of the management rights to MAp's key asset, the Sydney Airport. Either way, MacBank has been gradually withdrawing from the "Macquarie Model” of infrastructure fund investments since the start of the financial crisis. As it continues to reinvent itself, expect more activity in this area.

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National Australia Bank

After raising $2 billion from institutional investors, and ahead of a $750 million offer to retail shareholders, the National Australia Bank continues to plan what it will do with all the money it is raising. One of the world's strongest banks in relative terms, there will still be a lot of money in the kitty beyond the welcome increase to tier one capital and a cushion for litigation payments in New Zealand and bad debt from forays into collateralised debt obligations and other such things. Talk continues that among acquisition opportunities in the United Kingdom, the $920 million Australian loan group of struggling commercial lender CIT Group may be of interest (See Lunch Deals: Napping a war chest). NAB might also wish to follow in the footsteps of former Australian chief executive Ahmad Fahour, who has taken a job at Islamic bank Gulf Finance House in Bahrain. Islamic banking is currently one of the strongest areas of finance and is growing at between 15 and 20 per cent per annum, according to industry data. Global lenders like Citigroup, HSBC and Deutsche Bank have already entered the sector and last month NAB itself announced plans to offer Sharia-compliant loans to Muslim and non-Muslim customers in Australia. The sector is also ripe for mergers and acquisitions. Most Islamic banks are tiny and the market is highly fragmented. With many new Islamic banks in places like Dubai created during the oil and speculation-fuelled boom, gaining a foothold will be relatively easy and cheap. Two Gulf Islamic home lenders, Amlak Finance PJSC and Tamweel PJSC are presently in merger talks, and earlier this week the National Bank of Kuwait bought a 13.2 per cent stake in Islamic lender Boubyan Bank for $US295 million.