Anglo-Australian miner Rio Tinto made a $3.5bn (£2.2bn) bid approach for Africa-focussed Riversdale Mining, sending the target firm's shares surging 16 per cent and setting up a potential takeover battle.
Rio's move on Australia's Riversdale is likely to spark a bidding war, as the company has hard coking-coal projects in Mozambique that could eventually supply 5-10 per cent of the global market for the key steel-making material.
Brazil's Vale is seen by analysts as the most likely rival bidder, as it already has coal mines nearby in Mozambique. India's Tata Steel, Riversdale's top shareholder, was also seen as a potential bidder.
Xstrata, Anglo American and Peabody Energy could also be interested. Top coking-coal exporter BHP Billiton is seen as a less likely contender, as it has its own growth options in Australia.
The company's fourth-biggest shareholder, Australian investment firm LinQ Management, expects Riversdale to be hotly contested, given the scarcity of good quality coking-coal assets and booming demand from China and India for the commodity.
"It's in a good part of the world for accessibility, and we think there's plenty of further upside for whoever's interested in buying it. Hopefully there will be other interested suitors coming to the table," LinQ Managing Director Clive Donner said.
Riversdale confirmed media reports that Rio was talking about an offer around A$15 a share for Riversdale, which would value the group at A$3.5bn (£2.2bn), only a six per cent premium on Riversdale's close on 3 December. Riversdale also hinted that it was talking to others.
"While discussions with Rio Tinto are ongoing, there is no certainty that Rio Tinto or any other party will proceed with any proposal for the acquisition of Riversdale," Riversdale said.
Rio Tinto declined to comment on Riversdale's statement. The smaller miner's shares hit a high of A$16.41 on Monday, its biggest one-day gain in more than two years. They ended up 15.7 per cent at A$16.31.
UBS is advising Riversdale, and Macquarie is advising Rio Tinto.
A deal would mark Rio Tinto's first significant acquisition since its badly timed $38 billion takeover of Alcan at the height of the commodities boom in 2007, which forced it to sell more than $13 billion worth of assets to help slash debt.
City A.M. Reporter