Rio Tinto Group

Chinalco rules out bigger Rio Tinto stake after US$14b deal

PUBLISHED : Tuesday, 05 February, 2008, 12:00am
UPDATED : Friday, 28 October, 2016, 9:17am

The president of state-owned Aluminum Corp of China (Chinalco) yesterday ruled out any plans to raise the company's stake in Rio Tinto after its US$14 billion share purchase last week threatened to kill BHP Billiton's bid for the global mining giant.

Describing the investment as strategic, Chinalco president Xiao Yaqin said yesterday in Sydney that the mainland firm had no intention of interfering in Rio Tinto's management.

Shares of Aluminum Corp of China (Chalco) - Chinalco's Hong Kong-listed unit - BHP and Rio Tinto jumped yesterday after Chinalco revealed on Friday its joint effort with United States counterpart Alcoa to buy 12 per cent of Rio Tinto for US$14.05 billion.

The deal came days before tomorrow's deadline for BHP, the world's largest mining firm, to decide whether to proceed with its all-share offer for Rio Tinto, the world's third-largest with mines in Australia, New Zealand and South Africa.

While Mr Xiao characterised the Chinalco-Alcoa purchase as coincidental, analysts believe BHP will have to sweeten its offer, valued at US$140 billion, if it expects to succeed.

Chalco shares led gains yesterday, jumping 11.11 per cent to HK$13.60. BHP rose 2 per cent to A$39.32 (HK$278.15) and Rio Tinto added 0.63 per cent to A$128.11.

Fitch Ratings director Frederic Gits said if BHP's bid for Rio Tinto fell through, it would be positive for China's metals industry. 'Although [raising its stake further] is not Chinalco's declared intention, its move may derail BHP's bid for Rio Tinto,' he said. 'Should this happen, the impact on the Chinese industry, which perceives as a threat the possible merger of two of its most important raw material suppliers in an already oligopolistic industry, would be positive.'

Chalco would benefit from the Chinalco-Alcoa deal by gaining better access to raw materials, but Chinalco's financial burden from the deal could lead to some strain on its capital structure, he said. Chinalco might need to seek a bigger dividend from Chalco.

The 12 per cent stake Chinalco and Alcoa bought in Rio Tinto's London-listed shares translates into about 9 per cent of the overall company, which is also listed in Australia.

The deal, in which Alcoa contributed only about US$1.2 billion, marks China's largest investment overseas.