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Chinalco may invest up to US$20b in Rio Tinto

By Brett Foley | February 12, 2009, Thursday | Print Edition

ALUMINUM Corp of China, the nation's biggest producer of the metal, may invest as much as US$20 billion in Rio Tinto Group to gain more access to commodities, a person with knowledge of the matter said.

Chinalco, as the company is known, is in talks to buy bonds that will convert into Rio shares and purchase stakes in Rio mines, the person said, declining to be identified as the details aren't public. An announcement is planned today when Rio publishes its annual earnings, the person said. Rio's stock gained 6.2 percent in Sydney trading.

Rio last week said it was in talks with Chinalco to raise cash by selling notes and parts of some units to reduce its US$38.9 billion of debt. Chairman-elect Jim Leng quit last week, after less than a month, because of a disagreement over how to cut debt at the company, which is also considering a broader share sale.

"Rio would get the cash they need, and Chinalco would get greater access to the natural resources that they need," Tobias Woerner, an analyst at MF Global Securities Ltd in London, said on Tuesday by telephone with Bloomberg News. "Unless you think the China story is over, Chinalco are going to need those resources, and this deal would deliver them at a potentially more attractive rate than only a year ago."

Rio rose A$3.04 to A$52 (US$34.21) at the close in Sydney on the Australian stock exchange, outperforming bigger rival BHP Billiton Ltd, which fell 2.9 percent. Rio's shares have slumped 13 percent since BHP withdrew its US$66 billion takeover offer in November. BHP has risen 38 percent.

Aluminum Corp of China Ltd, Chinalco's listed unit, ended 0.69 percent higher in Hong Kong trading at HK$4.40 (57 US cents), and rose 3.87 percent to close at 9.93 yuan (US$1.45) in Shanghai yesterday.

London-based Rio, which plans to sell assets and cut jobs and spending to lower debt by US$10 billion this year, on January 28 said it was considering a rights offer to help reduce debt. It has debt of US$38.9 billion after buying Canadian aluminum maker Alcan Inc in 2007.

Chinalco may be interested in Rio's bauxite and alumina assets at Weipa, Gove and Yarwun in north Australia, Credit Suisse Group's Sydney-based analyst Paul McTaggart wrote in a Tuesday report. Bauxite is an ore refined into alumina, which is used to make aluminum.

Chinalco became Rio's largest shareholder last year after acquiring a 9-percent stake. A possible sale of more stock to Chinalco may be blocked by the Australian government, UBS AG analysts led by Glyn Lawcock said in a report this week. Australia may limit ownership under the Foreign Investment Review Board regime to 15 percent, the analysts said.

Western Australia wouldn't stand in the way of Chinalco increasing its stake in Rio, Premier Colin Barnett said.

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