Titans of the Chinalco affair
The only way to understand what really happened in the Rio Tinto, Chinalco, BHP saga is to understand the extraordinary roles played by the companies' chairmen.
The only way to understand what really happened in the Rio Tinto, Alcan, Chinalco, BHP saga is to understand the role of three chairmen: Rio Tinto's Paul Skinner and Jan du Plessis and BHP's Don Argus.
And the next stage of the saga will involve Don Argus's successor Jacques Nasser and, of course again, his opposite number at Rio, Jan du Plessis.
According to the Fairfax China correspondent John Garnaut, a Chinese government post-mortem into the collapse of the Chinalco and Rio Tinto deal has exonerated the Australian government and Rio Tinto. It looks like it may not have exonerated BHP.
The deal that brought Rio Tinto to its knees in 2008-09 was the $US40 billion acquisition of Alcan in 2007 funded by borrowings. The Alcan deal that was negotiated by the then chairman of Rio Tinto, Paul Skinner. Tom Albanese became chief executive just before the Alcan deal was brought together but it was Paul Skinner's deal. Had Skinner and Rio Tinto financed the Alcan deal with equity, or pre-sold the essential parts, Skinner might have been a hero. Instead he brought Rio Tinto to its knees and the Alcan deal borrowings were the main reason why in November 2008, in the middle of the global financial crisis, BHP called off its takeover bid for Rio Tinto.
Early in 2009, Rio Tinto was in danger of falling into receivership. When Paul Skinner sat down with Chinalco he must have been desperate. He agreed to a deal with Chinalco whereby it not only took equity in all the Rio Tinto operations but had a significant role in all the administrative committees.
The Chinese government post-mortem recognises that Chinalco wanted too much too fast by combining a large equity investment with separate joint ventures in individual assets.
When the Chinalco deal was put to the Rio Tinto board, the board was split. The opposition was led by the current chairman Jan du Plessis, but he was rolled by those who backed Paul Skinner.
Enter BHP chairman Don Argus. There is no doubt that whether it was deliberate or by accident, the Chinalco-Rio Tinto deal would have skewered BHP. Don Argus's job as BHP chairman was to oppose it vigorously. There is no doubt he did that to perfection.
But the BHP chairman's task was made much easier because Chinalco, on discovering that Rio Tinto was on the ropes, had overplayed its hand. In my view, under the proposed arrangement with the state owned Chinalco, Rio Tinto would have become a subsidiary of the Chinese government. I recognise that Rio Tinto dispute my interpretation but there can be no doubt that the real level of Chinalco control was much greater than appeared on the surface.
This made the job of the BHP chairman much easier than it should have been. And he was also lucky because as the market improved the price that had been negotiated was simply out of line with the market.
When Jan du Plessis became chairman of Rio Tinto he found a very hostile group of Rio Tinto shareholders who had similar attitude to the Chinalco deal to Du Plessis's original view point.
He also stepped back and asked: "How does Rio Tinto maximise the increase in the value of its assets?” He determined that the best way to do that was to undertake a joint production venture with BHP iron ore (Full coverage: Rio-BHP joint venture).
As of now, Jan du Plessis is as committed to that joint venture as BHP chairman Don Argus and his successor Jacques Nasser.
The Chinese exoneration is going to make it much easier for du Plessis to repair the fences and establish much better relations despite the Stern Hu affair (Full coverage: Stern Hu's detention in China).
In some ways, Don Argus's successor Jacques Nasser has a tougher task in rebuilding bridges than du Plessis. BHP is unfairly seen as the villain who overturned the Chinalco deal (it was a deal that would never have been approved even without BHP), and the Chinese acrimony over the joint venture tends to be concentrated on BHP.
So Don Argus has left Nasser and BHP CEO Marius Kloppers with a some fences to rebuild, but if the iron ore joint venture gets through all the regulatory hurdles that will be a small price to pay.
And the next stage of the saga will involve Don Argus's successor Jacques Nasser and, of course again, his opposite number at Rio, Jan du Plessis.
According to the Fairfax China correspondent John Garnaut, a Chinese government post-mortem into the collapse of the Chinalco and Rio Tinto deal has exonerated the Australian government and Rio Tinto. It looks like it may not have exonerated BHP.
The deal that brought Rio Tinto to its knees in 2008-09 was the $US40 billion acquisition of Alcan in 2007 funded by borrowings. The Alcan deal that was negotiated by the then chairman of Rio Tinto, Paul Skinner. Tom Albanese became chief executive just before the Alcan deal was brought together but it was Paul Skinner's deal. Had Skinner and Rio Tinto financed the Alcan deal with equity, or pre-sold the essential parts, Skinner might have been a hero. Instead he brought Rio Tinto to its knees and the Alcan deal borrowings were the main reason why in November 2008, in the middle of the global financial crisis, BHP called off its takeover bid for Rio Tinto.
Early in 2009, Rio Tinto was in danger of falling into receivership. When Paul Skinner sat down with Chinalco he must have been desperate. He agreed to a deal with Chinalco whereby it not only took equity in all the Rio Tinto operations but had a significant role in all the administrative committees.
The Chinese government post-mortem recognises that Chinalco wanted too much too fast by combining a large equity investment with separate joint ventures in individual assets.
When the Chinalco deal was put to the Rio Tinto board, the board was split. The opposition was led by the current chairman Jan du Plessis, but he was rolled by those who backed Paul Skinner.
Enter BHP chairman Don Argus. There is no doubt that whether it was deliberate or by accident, the Chinalco-Rio Tinto deal would have skewered BHP. Don Argus's job as BHP chairman was to oppose it vigorously. There is no doubt he did that to perfection.
But the BHP chairman's task was made much easier because Chinalco, on discovering that Rio Tinto was on the ropes, had overplayed its hand. In my view, under the proposed arrangement with the state owned Chinalco, Rio Tinto would have become a subsidiary of the Chinese government. I recognise that Rio Tinto dispute my interpretation but there can be no doubt that the real level of Chinalco control was much greater than appeared on the surface.
This made the job of the BHP chairman much easier than it should have been. And he was also lucky because as the market improved the price that had been negotiated was simply out of line with the market.
When Jan du Plessis became chairman of Rio Tinto he found a very hostile group of Rio Tinto shareholders who had similar attitude to the Chinalco deal to Du Plessis's original view point.
He also stepped back and asked: "How does Rio Tinto maximise the increase in the value of its assets?” He determined that the best way to do that was to undertake a joint production venture with BHP iron ore (Full coverage: Rio-BHP joint venture).
As of now, Jan du Plessis is as committed to that joint venture as BHP chairman Don Argus and his successor Jacques Nasser.
The Chinese exoneration is going to make it much easier for du Plessis to repair the fences and establish much better relations despite the Stern Hu affair (Full coverage: Stern Hu's detention in China).
In some ways, Don Argus's successor Jacques Nasser has a tougher task in rebuilding bridges than du Plessis. BHP is unfairly seen as the villain who overturned the Chinalco deal (it was a deal that would never have been approved even without BHP), and the Chinese acrimony over the joint venture tends to be concentrated on BHP.
So Don Argus has left Nasser and BHP CEO Marius Kloppers with a some fences to rebuild, but if the iron ore joint venture gets through all the regulatory hurdles that will be a small price to pay.
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