Rio Tinto receives China investment

Bloomberg

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Aluminum Corp. of China agreed to invest $19.5 billion in debt-laden Rio Tinto Group, gaining access to copper and iron ore resources in the nation’s largest overseas acquisition.

Chinalco, as the state-owned company is known, will buy $7.2 billion of convertible bonds and acquire stakes in projects for $12.3 billion in Chile, Australia and the U.S., London-based Rio said yesterday in a statement. Chinalco will own 18 percent of Rio should it convert the debt.

Rio Chief Executive Officer Tom Albanese, who rejected BHP Billiton’s $66 billion hostile bid last year, will cut debt that grew 19-fold after the acquisition in 2007 of Alcan.

China is securing supplies to sustain economic growth after metal prices plunged 56 percent from a July high, ending a six-year commodity boom and slashing mine values.

"It’s a good strategy to buy copper and iron ore assets from Rio now, to take advantage of slashed valuations," said Li Zhuiyang, analyst at Citic Securities in Shanghai. "Only with strong Chinese government support can Chinalco make such a huge deal."

Rejecting the BHP bid

Shares of Rio, the world’s third-largest mining company, have dropped 17 percent since Nov. 24, the day before BHP said it abandoned its offer, valuing Rio at 31.5 billion pounds ($45.1 billion). Rio yesterday reported a 50 percent decline in full-year net income after taking a one-time charge for writing down the value of its aluminum assets.

"Rio management did not engage with BHP at what one could argue was the top of the cycle," said Prasad Patkar, who helps manage the equivalent of $800 million at Sydney-based Platypus Asset Management. "Now they want to engage Chinalco at what could be the bottom of the commodity price cycle, while excluding current shareholders from the deal."

Chinalco’s proposal was "far superior" to other options Rio’s board considered, and represented "better value" compared with BHP’s offer, Albanese said yesterday in a conference call. Chinalco will own stakes in projects including the Escondida copper mine in Chile, the Hamersley iron ore mines in Western Australia, the Weipa bauxite asset and Yarwun alumina refinery in Queensland. Chinalco will pay $5.1 billion for 15 percent of Hamersley and $3.4 billion for a half of Rio’s Escondida stake.

Raising funds

Beijing-based Chinalco, China’s largest aluminum producer, and New York-based Alcoa jointly bought a 9 percent stake in Rio last February at 6,000 pence a share. Rio shares are listed in both London and Sydney and the company has one-third of its assets in Australia. Chinalco said yesterday it will buy out Alcoa’s interest in Rio for $1 billion.

Rio has sold assets, announced plans to cut 14,000 jobs and spending in a bid to lower its $38.9 billion of debt by $10 billion this year. On Jan. 28, Rio said it was considering a rights offer. Rio’s Chairman-elect Jim Leng quit because of a disagreement over how to cut debt, he said Feb. 9.

The deal "raises funds at a time when financial markets are distressed, materially reducing Rio Tinto’s indebtedness, strengthening its balance sheet and increasing its flexibility to pursue attractive investment opportunities throughout the cycle," Rio said in yesterday’s statement.

BHP is preparing to counter-bid for some of Rio’s assets if the agreed price with Chinalco is too low, the Times reported on its Web site yesterday. If BHP’s offer is rejected by the Rio board, BHP may approach shareholders, the newspaper said.

Rio will pay Chinalco a coupon rate of 9 percent to 9.5 percent for the 60-year debt, which it can buy back after seven years, Rio said. Should Chinalco convert the debt, its stake in the London-listed entity will increase to 19 percent and it will have a 14.9 percent stake in Rio’s Australian entity.

"Undoubtedly Chinalco is getting a good price" for Rio’s assets, said Andrew Sekely, head of Australian equities at Intersuisse. "If you have the money then you hold all the cards."

Chinese companies offered at least $18 billion last year to buy mining assets globally, taking advantage of the financial crisis that slashed valuations. China, the world’s third-largest economy, has been scouring the globe for resources. Chinalco had as much as 60 billion yuan ($8.8 billion) of cash, Vice President Lu Youqing said in November.

Still, the sale of more stock to Chinalco may be blocked by the Australian government, UBS analysts led by Glyn Lawcock said earlier this week. Australia limits ownership under the Foreign Investment Review Board regime to 15 percent. Chinalco got approval from Australian treasurer Wayne Swan in August to raise its stake in Rio to 11 percent.The government will change the Foreign Acquisitions and Takeovers Act so that any investment, including convertible notes, will be treated as equity from today, Swan said in an e-mailed statement before the Rio announcement.