The tie-up comes just months after the miner snubbed a $19.5bn merger with Chinalco – the state-owned metals giant and Rio Tinto shareholder – in favour of a deal with rival BHP Billiton.
China's appetite for iron ore is massive, and the deal with Guinea is set to yield revenues of $10bn a year for Rio. The West African country is politically unstable, and China's involvement provides a diplomatic and operational cushion for the miner. China's cooperation makes the deal financially viable; a $6bn railway needs to be built to transport the commodity.
Of the nine funds with an exposure of more than 5 per cent to Rio within the FSA Offshore sector, BGF World Mining has the highest weighting – 10 per cent – and has performed the best over a one-year period.
Funds with exposure to Rio Tinto
| Fund |
Rio Tinto exposure % | 1-yr | 3-yr | 5-yr | r2 | Ann.Alpha | Ann.Volatility | Sharpe |
| Baring - Australia | 5.8 | 89.97 | 45.09 |
104.92 | 0.97 |
0.68 |
30.23 |
0.24 |
| Baring - Global Resources | 7.1 | 53.63 | 17.33 | 91.65 | 0.89 | -5.28 |
32.69 |
0 |
| BGF - World Mining | 10 | 93.55 | 46.64 | 181.52 | 0.89 | 1.83 |
38.09 |
0.19 |
| CS - Equity Global Resources Aberdeen |
9.5 | 55.73 | 24.49 | 81.69 | 0.92 | -3.3 |
29.72 |
0.05 |
| Fidelity - Australia |
7.3 | 88.92 | 34.84 | 99.89 | 0.97 | -1.53 |
29.03 |
0.16 |
| FO Commodity & Energy |
35.82 |
29.86 |
82.62 |
1 |
0 |
21.35 |
0.19 |
|
| Fortis L Equity Materials World |
7.9 | 57.34 |
16.68 |
70.47 |
0.88 |
-5.38 |
34.05 |
0 |
| Lloyds - TSB International Portfolio UK Equity |
5.9 | 41.03 |
-15.1 |
11.26 |
0.94 |
-3.35 |
19.27 |
-0.02 |
| Quadrant - Symphony International Growth |
6 | 31.13 |
5.41 |
23.14 |
0.8 |
-1.27 |
19.58 |
-0.01 |
| RAB - Global Mining & Resources |
7 | 51.93 |
- |
- |
- |
- |
- |
- |
Source: Financial Express Analytics (From FSA Offshore Recognised universe. Rebased in Pounds Sterling)
It has returned 93.5 per cent to investors over a one year period, compared to a commodity & energy sector average of 35.8 per cent.
Performance of fund vs BGF World Mining
Source: Financial Express Analytics
The BlackRock fund's performance comes at a price, however. It took on 23.8 per cent of risk over a one year period to provide its returns, compared to its sector's 15.2 per cent.
"We believe in the long term prospects for mining, but are more cautious in the short term," Jonathan Wallis, director of fund research at Allenbridge says.
"As the Chinalco story illustrates, there is strong demand in China – and the other emerging markets – for commodities."
The World Mining fund, which has a Three Crown rating from Financial Express, is weighted heavily towards the mining giants.
Rio, BHP Billiton, Vale and Xstrata make up its top four holdings, with Anglo American and Newcrest Mining also in its top ten. The top ten holdings of the fund make up a hefty 56.7 per cent of its entire allocation.
All of the funds with this 5 per cent Rio Tinto exposure gave returns over a one-year period, but Quadrant Symphony International Growth returned the least – 31.1 per cent – to investors in the 12 months to 9 March 2010. It is in the fourth quartile for cumulative performance within its international equity sector over a one-year period.
The Quadrant fund, which is domiciled in the Isle of Man, took on the least risk of the nine funds, however, with 15.1 per cent.
Within the UT and OEIC Universe, meanwhile, First State's Global Resources fund has the highest exposure to Rio.
| Fund | Rio Tinto exposure % |
1-yr | 3-yr | 5-yr | r2 |
Ann.Alpha |
Ann.Volatility |
Sharpe |
| First State - Global Resources |
8.90 | 72.37 | 62.35 | 154.20 |
0.76 | 14.97 |
33.19 |
0.32 |
| Insight - Equity High Income |
7.30 | 51.04 | -2.69 | 24.77 | 0.97 | 2.53 | 19.90 | -0.01 |
| Fidelity - UK Growth |
5.60 | 59.03 | 5.73 | 33.77 | 0.93 | 4.19 | 21.14 | -0.01 |
| Gartmore - UK Alpha |
5.60 | 53.83 | -36.58 | -13.42 | 0.93 | -11.14 | 25.99 | -0.05 |
| JPM - UK Dynamic |
5.50 | 47.75 | -6.77 | 43.38 | 0.97 | -1.12 | 20.29 | -0.02 |
| Royal London - UK Growth |
5.20 | 61.66 | 3.44 | 38.58 | 0.98 | 3.59 | 21.24 | -0.01 |
| GLG - UK Select |
6.1 | - | - |
- | - |
- | - |
- |
Source: Financial Express Analytics (Total Return Bid-Bid from IMA UT and OEICs universe. Rebased in £ Sterling. Data 17/03/2010)
The portfolio shines ahead of the UK-centric funds, perhaps thanks to First State's high-volatility global mandate. Its looser R-squared correlation shows the managers are ploughing their own furrow, while not straying too far off the beaten track.
Positive Sharpe indicates that its risk factor is being rewarded. Insight also takes a bold position on Rio, but risk-adjusted Sharpe is making them look like laggards.
On this measure, no other fund in this group really shines, but the new GLG vehicle, which was launched 3 August 2009 also looks very positive on Rio. A 6.1 per cent weighting is a relatively bold bet on the miner.
It remains to be seen if it can generate returns like BGF World Mining’s, though, as it has no meaningful track record yet.
The Rio/Chinalco deal gives China its first direct stake in a high-quality, large-scale iron ore mine. As the emerging markets continue to gain momentum, mines – and the funds which hold them – are set to go from strength to strength.