Market Report: Rio firms up as rights issue rumours abate

Rio Tinto held firm last night, as talk about a possible rights issue was replaced with suggestions that the Chinese deal may be reworked if the miner's shares remain strong.

The dual London and Sydney-listed miner reiterated its commitment to the Chinalco deal overnight, following a query from the Australian Securities Exchange after the stock tumbled on rumours that the fundraising agreement was on ice, and that investors may instead face a discounted rights offering.

Liberum Capital, which weighed in after the miner clarified its stance, said that rumours were "misguided" anyway, and a rights issue was likely to be "bottom of the list" of options to Rio, which last night closed at 2,664p, up 70p.

So what is likely to be in the offing, if the share price remains at levels that make the Chinese option less of an imperative for shareholders (who, crucially, get to vote on the agreement in the summer)?

Building on feedback from shareholders, Liberum suggests that "rather than a binary approval/rejection outcome", there may be scope for a renegotiation if the stock continues to trade higher. "There are a multitude of scenarios that could play out under a renegotiated deal, with most focused on dealing with the convertible [bond], the most unpopular part of the deal," the broker said.

"One elegant compromise could be the scrapping of the Chinalco convertible in favour of a straight bond. This would leave Rio getting a cash injection of $12bn-plus for the asset sales to Chinalco (sufficient to avoid any equity issue); Chinalco would be left at 9 per cent in Rio, below the [Australian Foreign Investment Review Board's] sensitive level of 15 per cent; institutional investors would be happy at their treatment, and Chinalco would get an income yield to service their deal debt."

Parts of the wider sector strengthened, with traders piling in to make the most of the recent round of profit-taking. Vedanta Resources was the strongest of the lot, rising to 1316p, up 5.1 per cent, or 64p, while Antofagasta climbed to 570.5p, up 3.5 per cent, or 19p.

Overall, the FTSE 100 was broadly unchanged, easing slightly to 4,348.11, down 14.47 points, at the end of a relatively uneventful session. The FTSE 250 was slightly ahead, rising by 44.1 points to 7,472.87.

Barclays was the best-performing blue chip of the day, advancing to 267.75p, up almost 6 per cent, or 14.7p, after confirming that it was in talks regarding a possible sale of Barclays Global Investors, its fund management arm. Reports suggested a potential take-out price of about $10bn, with Black Rock and the Bank of New York Mellon mooted as possible suitors.

A sale of BGI would come in the way of CVC Capital Partners' bid to acquire iShares, BGI's exchange traded funds business. Barclays agreed to sell iShares for £3bn, but is free to agree to an alternative offer under a so-called "go-shop" clause.

HSBC was unsettled, easing to 532p, down 7.75p, as ING said that the earnings recovery story was already priced in. "Capital concerns are receding, and we believe the long run-up to returns above the cost of capital is already discounted in the price," the broker said, keeping the stock at "hold" and setting a 520p target price.

Elsewhere, Marks & Spencer, up 5.75p at 327.5p, was in focus, after Investec weighed in with a five-point manifesto, suggesting, among other things, a management change to bolster the high street bellwether.

On the downside, the telecoms group BT, which posted results in the previous session, retreated to 85p, down almost 4 per cent, or 3.4p, after UBS moved the stock to "sell" from "neutral", and Nomura lowered its target price to 100p from 110p.

On the second tier, the silicon wafer manufacturer PV Crystalox Solar fell to 93.5p, down more than 13 per cent, or 14.5p, after warning that, owing to weak demand, first-half revenues were likely to be 10 per cent behind the levels achieved last year.

SThree, the recruitment group, was 5.2 per cent, or 12p, lighter at 217.5p thanks to HSBC, which switched its stance on the stock to "neutral" from "overweight". "SThree has had a solid run since we upgraded to 'overweight' in April," the broker said. "However, its recent share price performance reduces the dividend protection to 5 per cent, and the stock close to mid-cycle valuations."

HSBC also downgraded Wolseley, the construction material company, which fell to 1,184p, down 3.6 per cent, or 44p, saying the share price rise precipitated by the company's issue implies what it deems "an undue reduction in risk". The broker added: "Until the underlying markets bottom, it is imprudent to expect any upward momentum in Wolseley's share price."

Among smaller companies, the oil and gas group Geopark fell back, retreating to 245p, down 5.8 per cent, or 15p, after raising about $11.7m via a placing.