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Chinalco to invest billions in Rio Tinto

  Mining group Rio Tinto has agreed to a $19.5 billion cash injection from China’s state-owned Chinalco in a deal aimed at cutting Rio’s debts, a source familiar with the deal said on Thursday.

The deal involves Chinalco spending $12.3 billion on stakes of 15-50% in nine assets owned by Rio, the source said. It would also buy $7.2 billion of bonds convertible into shares of Rio, the world’s largest maker of aluminium, second-largest iron ore miner and a top-five copper producer.

Chinalco, looking to secure resource supplies to feed a growing economy, would double its Rio stake to 18% from the 9% it bought with US aluminium giant Alcoa a year ago.

The plan is likely to face close scrutiny from the Australian government, which last year said Chinalco would need prior approval if it wanted to raise its stake in Rio above 15% of the group’s London shares. Australian investors and media were already criticizing the reported deal on Thursday.

Rio’s former suitor, bigger rival BHP Billiton, may also enter the fray, with counter bids for some of the asset stakes Chinalco is set to pick up, the Times Newspaper said on its website on Thursday.

BACKDOWN

The bailout by Chinalco represents a backdown for Rio Tinto CEO Tom Albanese and the board, which last year dismissed a 3.4-for-1 takeover offer from BHP as far too low. Rio’s shares are now trading at around 1.6 times BHP’s shares.

Rio has been forced into Chinalco’s embrace as Rio’s shares are down by around a fifth since BHP scrapped its $66 billion offer in November. Investors have been concerned about Rio’s $39 billion debt load, taken on when it bought Alcan in 2007.

“Rio’s board must be beside themselves having to do this. It’s very unfortunate timing, buying at the top and selling at the bottom and you might have expected more given Rio’s previously exemplary track record,” said Mark Pervan, senior commodities analyst at ANZ bank.

An agreement with Chinalco had been widely expected after Rio’s chairman-designate, Jim Leng, quit the mining group two days ago because of objections to a tie-up with the state-run Chinese aluminium maker, which is already Rio’s top shareholder.

Rio, the world’s third-biggest diversified mining group by market value, is expected to confirm the deal when it announces its annual results at 6 a.m. British time.

Australian Treasurer Wayne Swan said any deal would be scrutinized by the Foreign Investment Review Board in the “normal way.” Swan has a veto over foreign investment. The government has said it would look closely at investments by foreign state-owned entities to ensure they were not pursuing a political or strategic agenda.

Money coming in from Chinalco would ease investor concerns over a $9 billion debt payment that Rio has due in October.

EARLY CRITICISM

But at least two fund managers and analysts in Australia said Rio could run into problems when shareholders vote on a deal. Criticism has focused on Rio allowing a big state-owned customer, which has an incentive to keep prices down, so much influence over the group and direct stakes in prized assets.

“This approach is a bit of a worry. They seem to have favored one shareholder over all the others,” said ABN AMRO analyst Warren Edney. Ken West, of Perennial Growth, added: “It seems to me to be a blurry sort of connection that long term may not be healthy for the market place.”

Rio’s London shares climbed 3.5% to 1,969 pence on Wednesday, outperforming a 0.7% increase in the UK mining index, after jumping 6.2% in Australia. Rio shares were put on a trading halt in Australia ahead of the announcement expected after the market closes on Thursday.

The cost of insuring Rio’s debt fell on word of the potential Chinalco investment, with Rio’s credit default swaps down by around 100 basis points to 525 bps, or $525,000 a year for five years, to insure $10 million in debt.

Chinalco will invest the $12.3 billion in three strategic partnerships with Rio across its copper, aluminium and iron ore divisions, the Financial Times said on Thursday. This would involve Chinalco taking minority stakes in Rio assets around the world -- at Weipa, Yarwun, Boyne & Gladstone Power, Escondida, KUC, Grasberg, la Granja and Hamersley Iron.

Rio owns 30% of Escondida, the world’s biggest copper mine. BHP, which owns 57% of the Chilean mine, has said it would be interested in Rio’s Escondida stake if it was for sale. BHP declined to comment on Thursday. (Reuters)