S&P Walked Away From Rio Tinto (RTP, BHP)

Standard & Poors took an already unenthusiastic "Hold" rating on U.K.-based metals giant Rio Tinto (NYSE:RTP) ADR’s down to the beloved "Sell" rating.  This was after a 29% pre-market gain in share prices based on the Australia-based BHP Billiton (NYSE:BHP) unsolicited offer to acquire the company in a stock for stock swap.  This would value Rio Tinto at $414 per share.  Rio Tinto did reject the offer with the statement that it undervalued the price for the company.  S&P said that based upon the assumption that Billiton will ultimately buy it, S&P raised its $250 target to $438 per ADR.  Since the value was above the target, S&P says sell. 

24/7 Wall St. thinks there is a much larger issue than today’s call from S&P, regardless of when their call came. Rio Tinto plc closed up 23% at $440.20 in regular trading, above the prior $376.40 high over the last year.  Shares are up more than 300% since mid-2004.  And this is ‘undervalued’? As of today’s close, BHP’s market cap was $218 Billion and RTP’s market cap was $141 Billion (after the gain).

We aren’t sure which government or international agency out there should be blocking these giant mergers, but realistically 24/7 Wall St. wonders just how big these metals companies will be allowed to grow to before everyone realizes that metals prices of any real size will be a supply-controlled market ruled by price-fixing.  That will not be a good development for anyone other than the conglomerate mining and commodity monopolies.

Jon C. Ogg
November 8, 2007

Jon Ogg produces the Special Situation Investing Newsletter; he does not own securities in the companies he covers.