BHP Billiton

US$14b Rio deal loads up Chinalco portfolio

PUBLISHED : Saturday, 02 February, 2008, 12:00am
UPDATED : Saturday, 02 February, 2008, 12:00am

Aluminum Corp of China's US$14.05 billion investment in iron ore giant Rio Tinto not only marks the mainland's largest overseas acquisition but transforms Chinalco into a diversified mining company.

'Rio is just not about iron ore,' Everbright mining analyst Wayne Fung said. 'Chinalco is transforming from a pure aluminium play into other metals like copper, tin, titanium and other kinds of production.'

Chinalco in August last year completed an US$860 million takeover of Peru Copper, giving it total copper reserves of about 20 million tonnes.

The purchase with joint-venture partner Alcoa makes the state-owned firm the biggest shareholder in the world's third-biggest miner and also signals Beijing's willingness to be more aggressive in securing future resources.

It is a potential deal killer for BHP Billiton, which made a bid for Rio Tinto late last year. Speculation that Beijing would not tolerate a near-monopoly in the iron ore trade in any BHP-Rio tie-up surfaced soon after BHP announced its bid in November. Baosteel Group Corp reportedly approached Nippon Steel and Posco Steel about a counter-bid but nothing came of the effort.

Baosteel denied it was planning to make a bid for Rio after the mainland's 21st Century Business Herald reported on December 4 that chairman Xu Lejiang said the possibility of a bid from Baosteel or other mainland steelmakers was high.

Rival steelmaker Shougang Corp director Chen Hanyu in the same month told Bloomberg that mainland steelmakers and the government were studying a bid for Rio.

Expectations of a spoiling move to prevent the BHP takeover accelerated when London's Sunday Telegraph reported state-owned China Development Bank had taken a small stake in Rio last month. The bank denied the move.

Chinalco and Alcoa jointly acquired 120 million shares of Rio Tinto at #60 (HK$932.04) each. That is a 21 per cent premium to Thursday's closing price in London. Rio Tinto, which is listed in London and Sydney, said the 12 per cent stake was equivalent to 9 per cent of the company listed in Australia.

Alcoa, the third-largest aluminium producer, will be a junior partner in the venture. The stake makes the two companies the largest single shareholder in Rio. Legal and General Group, with a 5.13 per cent stake, is the second-largest shareholder.

Ren Yunhe, a metal researcher with Shenyin & Wanguo Securities, said the move would effectively thwart BHP Billiton's bid to buy Rio.

'BHP, of course, could come up with a higher offer, but I think time is against them now because they have to persuade shareholders to endorse a new offer before the February 6 deadline,' Mr Ren said.

Under British takeover rules, BHP has until Wednesday to place a bid or it will have to wait six months to try again.

BHP said in November it would offer Rio shareholders three BHP shares for every Rio share in a US$140 billion bid. Rio management rejected the offer as too low.

The deal by Chinalco and its partner marks the largest overseas transaction by a Chinese company as the mainland increases mergers and acquisitions. The deal dwarfs the US$5.4 billion paid in October by Industrial and Commercial Bank of China for a 20 per cent stake in Africa's Standard Bank Group. Sovereign fund China Investment Corp paid US$5 billion for a 9.9 per cent stake in US investment bank Morgan Stanley.

The mainland's drive to acquire natural resources would continue, market observers said.

'For Chinese metals producers the major problem is the lack of raw materials, so for aluminium they need bauxite and for steel iron ore,' Mr Fung said. 'They need to rely on overseas resources, so if they can secure the raw materials, then prices will be less volatile.'

Ore struck

November 8, 2007: BHP Billiton makes long-awaited approach to Rio Tinto with a US$139 billion all-share takeover offer aimed at creating a US$350 billion-plus mining giant. Rio rejects proposal as too low

November 20: European steel industry calls on European Commission to block BHP's plan because of competition concerns

November 25: China Investment Corp, the country's US$200 billion sovereign wealth fund, is reported to be planning a counterbid for Rio Tinto. CIC denies the report

December 5: Shanghai's Baosteel Group says it is considering leading other mainland steelmakers into the takeover battle with a bid that can well exceed BHP's offer

December 10: Shares of Baoshan Iron & Steel are suspended amid speculation of the firm becoming involved in a bid for Rio Tinto. No bid materialises

December 22: At the urging of Rio Tinto, Britain's takeover authorities give BHP a February 6 deadline to 'put up or shut up'

January 30, 2008: Rio Tinto's advisers say the company can be tempted by an increased bid of about US$157 billion from BHP

February 1: Chinalco and US giant Alcoa agree to pay US$14.05 billion for 12 per cent of Rio Tinto, a big enough slice to block any BHP deal