Chinalco’s $20 Billion Stake In Rio Tinto Is No Done Deal

The global slump in share prices has given Aluminum Corp. of China an opportunity to buy strategic assets at bargain basement prices that it didn’t have a year ago.

Anglo-Australian miner Rio Tinto says it is getting a $20 billion cash injection from the state-owned aluminum producer usually known as Chinalco. It will be the largest investment by a Chinese firm in a foreign company and could double Chinalco’s stake in the miner from 9% to 18% if the debt part of the deal, worth $7.2 billion, is converted into equity.

The rest of the deal is structured around investments in Rio projects around the world including copper mines in Chile, iron ore mines in Australia and Rio’s aluminum business there, and mines in the U.S., all providing Chinalco with long-term access to raw materials its economy will need once robust growth returns.

Rio needs the investment to pay down its debt of $39 billion, mostly taken on when it bought it Alcan in 2007 for a rich price near the top of the commodities cycle. Some $19 billion of repayments fall due in October and October 2010.

Chinalco will get two non-exec seats on Rio’s board, which suggests a relatively hands-off relationship, though there is no escaping the fact that Rio is taking on board a key customer that is also a state-controlled company with an interest in low prices for high-grade iron ore. For its part, Chinalco needs to be seen to be being restrained, given the political sensitivity to foreign ownership of mines, particularly in Australia but also in the U.S.

The proposed deal comes barely three days after Jim Leng, Rio’s chairman designate, resigned, reflecting internal divisions over whether such a deal was the best way to pay down the company’s debt. Leng favoured raising capital from the company’s exisiting shareholders via a rights issue.

Some of the largest of those shareholders are criticizing the Chinalco investment. They fear Rio, which last year rejected an $66 billion takeover approach from rival Anglo-Australian miner BHP Billiton, is selling the family silver at fire-sale prices, and not giving them an opportunity to stump up capital either directly or by participating in the convertible bond issue. As structured now the issue would dilute their holdings and provide a blocking stake on any future takeover, all of which may be too high a price for what is essentially a long term loan that will only convert at a substantial premium to the current share price.

The deal will need to be approved by Rio’s shareholders and a slew of  relevant authorities, including the Australian and Chilean governments. Chinalco’s stock market raid on Rio last year, when it took its 9% stake, prompted the Australian authorities to strengthen the “national interest” test for foreign investments, and subsequently to put a cap on Chinalco’s stake in Rio, which this deal would breach. There will be some anxious days ahead on several fronts before this deal can clear.

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2 responses to “Chinalco’s $20 Billion Stake In Rio Tinto Is No Done Deal

  1. Pingback: Rio Tinto Confident Chinalco Deal Will Pass Australian Regualtors « China Bystander

  2. Pingback: Will Australia Retaliate For Coca-Cola’s Blocked China Bid? « China Bystander

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