If Rio Tinto was under any misconception that its recommended bid for Riversdale Mining would proceed smoothly, the disclosure by Brazilian steel maker and Riversdale shareholder CSN that it has increased its already substantial stake would have dispelled it.

Not that Rio Tinto would have been that naïve, but CSN’s decision to lift its shareholding from 16.29% to 17.6%, at an average cost of $15.96 per share, would have reinforced the growing conviction that even with a board recommendation and a minimum acceptance condition of only 50.1% its $16 a share offer faces some challenges.

When Rio Tinto initially bid, CSN had a shareholding of about 13%, so the build up in the stake is strategically significant and the price paid for the latest purchases would tend to suggest that CSN isn’t buying at $15.96 to sell to Rio at $16.

As discussed previously, Riversdale has an “interesting” register (Rio’s trouble at the register, February 2). Apart from CSN, India’s Tata Steel owns 24.36% and a US hedge fund, Passport Capital about 13%, although Rio Tinto has a call option over 7.9% as part of several pre-bid arrangements that enabled Rio to put its foot on 15% of Riversdale.

The two steel makers between them now control about 42% of Riversdale, which will make it difficult, albeit not impossible, for Rio to achieve its minimum objective of a 50.1% interest. If Passport were to hold onto the unencumbered part of its shareholding, it would be practically impossible.

It is conceivable that CSN is simply trying to pressure Rio into increasing its offer but the more obvious explanation for outlaying another $76 million to top up its shareholding is that it has little to do with making a bigger profit on its investment and far more to do with CSN’s interest in getting access to the coal that Riversdale will eventually produce from its giant Zambeze project in Mozambique. Tata would probably have the same interest.

The obvious option for avoiding an impasse that causes its bid to fail would be for Rio Tinto to negotiate off-take agreements with the steel makers. It can’t, however, do that in the context of a bid without breaching the prohibition on offering special benefits to some shareholders.

Tata and CSN aren’t necessarily inimical towards Rio Tinto or the concept of it obtaining control of Riversdale. The Zambeze project probably requires a group with Rio’s resources and capabilities if it is to be efficiently developed.

It is conceivable that Tata and CSN could be convinced to sell some of their holdings to Rio Tinto to get it across the line while retaining enough of Riversdale’s capital to be a force Rio needs to reckon with post-bid. They might, however, equally prefer the status quo, particularly given Rio’s developing relationship with China and China’s own insatiable appetite for metallurgical coal.

Rio could create some pressure by dropping its minimum acceptance condition and raising its bid to generate some acceptances and create at least the possibility of trapping Tata and CSN in as minorities (although it would presumably have to tie up the entire Passport shareholding at the outset to have any chance of success).

The size of the stakes — it is a $US3.9 billion bid — would makes that a fairly dangerous game to play because it would be more likely that it would be Rio Tinto that ended up with a lot of dead money locked into a less-than-controlling stake. The post-crisis Rio — and indeed Rio for almost all of its history — is a relatively risk-averse organisation as resource companies go.

It is unclear how Rio Tinto will resolve the bid if Tata and CSN are indifferent to the prospective profits on their investments and determined to use their holdings to try to protect access to Zambeze’s future production.

Given that this is Rio Tinto’s first big attempted acquisition after its brush with disaster during the crisis, however, one suspects it will want the outcome to be either a clean win or it will walk away empty-handed rather than risk an expensive and messy stalemate.

*This article was originally published on Business Spectator.