Miner Rio Tinto scraps Chinalco deal

By Kristen Gelineau

Associated Press

SYDNEY — Anglo-Australian miner Rio Tinto PLC on Friday scrapped its $19.5 billion deal with China’s Chinalco, choosing instead to raise $15.2 billion in a share sale and setting up a joint production venture with rival BHP Billiton Ltd.

Rio Tinto Chairman Jan du Plessis said in a letter to shareholders the planned deal with Chinalco was now dead and his company would pay it a $195 million break fee, thus ending what would have been China’s biggest overseas investment to date.

The proposed deal with Chinalco had sparked opposition in Australia, amid concerns that a foreign state-backed enterprise would own a strategic stake in the country’s biggest natural resource assets.


The move is a blow to China’s aggressive moves to cement access to resources needed to fuel the country’s rapid growth by taking strategic stakes in major producers.

"Although this deal did not go through, Chinalco’s strategy of internationalizing its mining business has not changed in the least. Chinalco intends to continue developing its global mining and search for strategic opportunities," the company said in a statement.

To raise money, Rio will offer current shareholders the opportunity to buy new stock at a discount.

Investors will be offered 21 new shares for every 40 they hold at 28.29 Australian dollars ($22.71) each, the company said in a statement posted on the Australian stock exchange. U.K. shareholders will be offered shares at 1,400 pence each.

In Sydney trading, Rio shares jumped AU$5.59, or 8.4 percent, to close at AU$72.49 Friday. In London, its shares were up 275 pence, or 10.1 percent, at 2,995.00 pence.

The company said the share deal would reduce the company’s overall debt, allowing it to meet repayment obligations.

Rio Tinto turned to Chinalco — whose full name is Aluminum Corp. of China — in February to help repair a balance sheet weighed down by $38.7 billion in debt. A payment of $8.9 billion was due in October.

Under the now-scrapped deal, Chinalco would have invested $12.3 billion in joint investments in aluminum, copper and ore mining with Rio Tinto, and spent $7.2 billion on convertible bonds in the company. If redeemed for shares, the bonds would have almost doubled Chinalco’s existing 9.3 percent stake in Rio Tinto Group to 18 percent.


But there has been speculation about the status of the deal for several weeks as financial markets have strengthened significantly, making it easier for Rio to raise capital on its own.

In a statement, Chinalco President Xiong Weiping said the Chinese company had "worked hard" to "make appropriate amendments to the transaction terms ... to better reflect the changed market background and feedback from shareholders and regulators."

Australia’s Foreign Investment Review Board was due to make a decision on the deal, based on national interest, by the middle of this month, with Prime Minister Kevin Rudd’s government then having the final say.

Rudd told reporters in Canberra he would be meeting with Xiong — who is currently in Australia — later Friday, saying, "We welcome Chinese investment in Australia."

"This has been a commercial decision reached by Rio in terms of its evaluation of the proposal put to it by Chinalco," Rudd said. "I think it’s very important that our friends in China focus on that fact."

Earlier Friday, Rio Tinto and its rival and former suitor BHP Billiton announced they will set up a joint production venture comprising all of their iron ore assets in Western Australia state, a move expected to save them billions.

The companies have signed a nonbinding agreement to establish the 50/50 joint venture, which covers all current and future iron ore assets and liabilities.

"Both companies believe the net present value of these unique production and development synergies will be in excess of $10 billion," BHP Billiton and Rio Tinto said in a joint statement.


Also, BHP Billiton will pay Rio Tinto $5.8 billion to equalize its contribution to the joint venture at 50 percent.

Chinalco said it would be paying very close attention to the tie-up between Rio Tinto and BHP Billiton. Last November, BHP called off its proposed $68 billion takeover of Rio Tinto. China had been unhappy over that potential joining of the two huge mining companies, fearing it might give them inordinate say over iron ore pricing.

BHP’s stock jumped AU$3.07, or 8.74 percent, to close at AU$38.18 in Sydney.

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