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Who said money was cheap? Shares in Rio Tinto tumbled 114p to 2386p — making it one of the biggest blue-chip fallers — after it discovered the real cost to its coffers of raising extra funds.
The mining giant, which last year rejected an approach worth 6000p a share from BHP Billiton, has raised $3.5 billion (£2.35 billion) by way of an issue of fixed-rate bonds. The issue is made up of $2 billion of five-year bonds yielding 8.95% and $1.5 billion of 10-year bonds paying a whopping 9%. That contrasts with American interest rates which are currently close to zero.
Dealers say Rio has been forced to agree to such generous terms in order to make sure it gets the issue away. Some companies, including other miners and property developers, have raised cash via share issues which have been steeply discounted by as much as 80%.
Rio's management has agreed to a $19.5 billion cash injection by the state-owned Aluminum Corporation of China (Chinalco). In return, Chinalco's stake in Rio is set to double to 18%. First-quarter production numbers from Rio were described as a “mixed bag”.
In a separate move, Rio may offer to split up the packaging and engineering divisions of its Alcan Aluminium business in order to attract buyers. There are signs of a small recovery in copper production, but aluminium and iron ore were both lower.
Shares generally traded a touch softer for choice, reflecting sharp falls in New York overnight. President Obama may have seen the green shoots of recovery but investors are still searching. The FTSE 100 index fell 17.51 to 3971.48.
The few buyers still in evidence focused on defensive stocks, such as Imperial Tobacco, up 43p at 1473p, British American Tobacco, 53p better at 1548p and Reckitt Benckiser, 85p higher at 2589p.
BG Group was also able to resist the general downturn in the rest of the market with its shares adding 17p to 1061p on news of another major in the Santos basin, offshore of Brazil. Panmure Gordon describes it as a “significant prospect”. It rates the shares a buy with a 1200p target.
AIM-listed Regal Petroleum fell 4¾p to 47½p after being sent packing by the banks. The oil and gas explorer with interests in Romania and Egypt has been in talks with Australia's Macquarie Bank about a loan facility for up to £67.5 million. It wants the money to strengthen is balance sheet and provide funds for its development strategy. But the talks have broken down. Regal raised £20.5 million in July last year, via the ill-fated Merrill Lynch. Almost 8.5 million shares were placed with investors at 245p each.
By coincidence, Merrill Lynch was behind today's placing of 265 million new shares in Afren at 32p. The placing will raise £84.8 million to help develop the oil explorer's development of the Ebok Field. The move may make existing Afren shareholders wince. Merrill Lynch was also behind a placing of 95 million Afren shares in April, last year, which raised £118 million. The placing was at 125p. Today the shares were changing hands ½p firmer at 39¼p.
Barclays Capital warns clients it may be too early to become involved in the leisure sector which it warns is “highly cyclical, highly operationally geared and highly financially geared — not a great starting point in a global economic downturn caused by a credit squeeze”.
The best performance can be expected from the package-holiday operators, such as TUI Travel, down 3p at 254½p, and Thomas Cook, 2p cheaper at 260¼p, which are both rated outperform along with the world's biggest independent caterer Compass, 1¼p softer at 334¾p. Thomas Cook is awarded a price target of 335p, with TUI on 395p and Compass 375p.
But it is a different story for the pub chain operators, many of which are in debt. Enterprise Inns, 10¼p better at 124p, just about passes muster with an equalweight rating and a 135p target. But Punch Taverns, 7½p dearer at 115p, and Mitchells & Butlers, down 13¾p at 270p, are rated underweight with respective price targets of 100p and 230p.
