Sidney, February 11: Aluminum Corp. of China (Chinalco)(NYSE:ACH) said it is in talks with Anglo-Australian mining giant Rio Tinto(NYSE: RTP) on a deal, estimated to be worth as much as $20 billion, in a bid to strengthen its grip on the supply of raw materials.
Rio Tinto talks with the Chinalco are part of an urgent refinancing by the mining company. Rio Tinto has been saddled with debt of $39 billion since taking over Alcan, as the credit crunch began in mid-2007. The recession curbed demand for metals, leading to lower prices and profits. This in turn made it more difficult for the mining company to reduce its debt.
Rio Tinto needs to raise money to pay off about $9 billion of debt due for repayment in October. The company has started to sell assets, cut almost 13 percent of jobs, reduced capital spending plans and considered a rights issue to repay debt.
According to sources, Chinalco would buy bonds convertible into Rio Tinto stock and purchase up to half of some of Rio’s mines. Under the deal, Chinalco would double its stake in Rio to 18 percent from the 9 percent stake it already has. This will make it the mining company’s biggest shareholder.
If a deal can be agreed, it would represent a substantial investment by the Chinese government and further reflect the shift in power between recession-struck developed countries and faster-growing Asian economies. Beijing has been aggressively building stakes in energy and natural resources companies to feed its rapidly growing economy.
An agreement with Chinalco had been widely expected after Rio's chairman-designate, Jim Leng, quit the mining group barely four weeks after his appointment, amid disagreements about how to reduce the company’s debt.
The plan is likely to face close scrutiny from the Australian government, which last year said Chinalco would need prior approval if it wanted to raise its stake in Rio above 15 percent of the group's London shares. Australian investors and media have reservations regarding the deal.
"This approach is a bit of a worry. They seem to have favoured one shareholder over all the others at this point in time," said ABN AMRO analyst Warren Edney.
Ken West, of Perennial Growth, added: "It seems to me to be a blurry sort of connection that long term may not be healthy for the market place."
According to the Financial Times, Chinalco will invest the $12.3 billion in three strategic partnerships with Rio across its copper, aluminum and iron ore divisions. This would mean Chinalco taking a minor stakes in a total of nine assets around the world -- at Weipa, Yarwun, Boyne & Gladstone Power, Escondida, KUC, Grasberg, la Granja and Hamersley Iron.
Chinalco would receive one seat on Rio's board and have the right to appoint another at a later date. Chinalco last year told the Australian government it would not seek a board seat.
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