Rio Tinto's value seen enhanced by high-price gold mine sale

Rio Tinto's above-consensus sale price for its gold mine to Barrick Gold almost certainly increases Rio's negotiating stance vis-a-vis takeover bids from BHP Billiton or from other potential suitors, an analyst told BloggingStocks Friday.

"Rio's sale of its gold mine to Barrick for $1.7 billion when the market was expecting something like $570-$700 million is a fundamental data point the market cannot ignore," independent stock analyst C. Leonard Bauer said Friday. "It will force BHP Billiton and others receptive to a deal to redo their fair-value projections for Rio."

Rio (NYSE: RTP) has twice rejected hostile buyout offers from BHP Billiton (NYSE: BHP), the last for $147.4 billion, involving at least 3.4 BHP shares for each Rio share, arguing that the bids substantially undervalue Rio. Rio gained 64 cents to $452.89 while BHP gained $1.01 to $72.89 in Friday afternoon trading.

At first glance, the idea of bidding wars for targets appears to be a paradox in the current economic environment. After all, the U.S. economy is barely inching along, and the credit markets can be described, at best, as being cautious regarding potential deals. But the mining sector is another story, Bauer said. Strong economic growth in emerging markets has created surging demand for raw materials, minerals, and commodities. Further, the sector is in the midst of mergers and expansions that will produce miners with global market capabilities.

Iron ore war?

The above demand, particularly from Asia, Bauer said, has offset recent, modest quarterly earnings performance from some miners, and has driven up the value of miners like Rio and Freeport McMoRan (NYSE: FC).

In addition, China's size and its economic development plan has further increased miners' value. China, which with Alcoa (NYSE: AA) earlier this year jointly purchased a 9% stake in Rio Tinto through its Chinalco aluminum company, has said it will continue to seek acquisitions of foreign companies, including mining companies, Bauer said. Bauer added that he does not have a rating on any mining company nor own their shares.

"China may ultimately try to outbid BHP because a BHP / Rio union would unite two of the three largest suppliers of iron ore, which China needs for its economy," Bauer said. "A BHP / Rio union would likely leave China in a weaker negotiating position regarding iron ore prices. So you can see why Rio feels BHP's offers so far have not valued the company fairly. Rio knows that as long as China grows, it has a commodity likely to increase in value substantially for years to come. And that's a good place to be in, from a corporate standpoint."