Chinalco pays US$19.5b for bonds and mines to boost Rio Tinto stake

PUBLISHED : Friday, 13 February, 2009, 12:00am
UPDATED : Friday, 13 February, 2009, 12:00am

State-owned Aluminum Corp of China (Chinalco) has agreed to invest US$19.5 billion in debt-laden Rio Tinto Group, gaining access to global mining resources in the mainland's largest overseas acquisition.

The Beijing-based parent of listed Aluminum Corp of China (Chalco) would buy US$7.2 billion of convertible bonds and pay US$12.34 billion for 15 to 50 per cent stakes in nine of Rio's copper, bauxite and iron ore mining assets in Australia, Chile, Indonesia, Peru and the United States, the Anglo-Australian mining giant said in a statement yesterday.

The bonds, with a 60-year maturity and a coupon rate of 9 to 9.5 per cent if converted, will lift Chinalco's stake in the world's third-biggest miner to 18 per cent from the 9 per cent it bought in February last year with US-based Alcoa for US$14 billion.

Alcoa said in a statement the Chinese firm also agreed to buy its interest in Rio for US$1.02 billion.

Chinalco will be entitled to nominate two new non-executive directors to the board of Rio, which yesterday reported a 50 per cent decline in full-year net income after taking a one-time charge for writing down the value of its aluminium assets.

'This strategic partnership represents a key step in Chinalco's development into one of the world's leading natural resources companies,' said Chinalco president Xiao Yaqing.

Mainland companies splashed out at least US$18 billion last year to buy mining assets globally, taking advantage of the financial crisis that slashed valuations.

'It is an appropriate time and a sound strategy for Chinalco amid a plunge in metal prices as domestic resources are not adequate to sustain its needs,' said Mei Xinyu, a researcher at the Ministry of Commerce's Research Institute of Foreign Trade and Economic Co-operation.

Rio said the deal, which needs approval from the governments of China, Britain, Australia and the US, as well as regulatory and antitrust approvals in Australia and Germany and Rio's shareholders, could materially reduce the company's indebtedness, strengthening its balance sheet and increasing its flexibility.

The deal is likely to face close scrutiny from the Australian government, which wants to ensure investments by foreign state-owned entities do not come with political or strategic strings. Shortly before Rio's announcement, Australian Treasurer Wayne Swan said the government would immediately tighten foreign ownership laws by treating convertible debt as if it were equity.

Mr Xiao, in an analysts' briefing in London, stressed 'commercial, not political considerations' were paramount, assuring Rio investors and regulators that his executives were not beholden to political leaders in Beijing.

'Despite the fact that we are a state-owned company, I'd like to emphasise that we are run completely independently and commercially,' he said.

The Chinalco-Rio transaction may also be challenged by BHP Billiton, which scrapped a US$66 billion hostile bid in November last year, with market speculation it is preparing a counterbid for some of Rio's assets.