UPDATE: Rio Tinto Confirms Asset Sale Talks With Chinalco
February 01 2009 - 8:09PM
Dow Jones News
Rio Tinto Ltd. (RTP) said Monday it has held talks with Aluminum
Corp. of China, or Chinalco, over the possible sale of minority
stakes in some of its mining operations and an investment in
convertible instruments.
The news was well received by the market and analysts said the
prospect of a big cash injection from China will help ease investor
fears that Rio Tinto could be forced to carry out a heavily
discounted and dilutive rights issue to pay down its debt.
In response to a number of media reports of talks with the
Chinese group, Rio released a statement confirming the talks but
stating that there is no certainty of a deal.
"Rio Tinto confirms that it has held discussions with Chinalco
regarding Chinalco acquiring minority interests in various
operating businesses of the Rio Tinto group and also investing in
convertible instruments," Rio said.
"There can be no certainty that a transaction will ultimately
take place and any possible transaction would be conditional upon
approval by the shareholders of Rio Tinto and all necessary
government and regulatory authorities."
Chinalco teamed up with Alcoa (AA) last year to pay US$14.1
billion for a 9% stake in Rio and has agreed to seek Australian
government approval if it decides to up its stake.
Chinalco wouldn't require Australian or U.K. approval to take
minority stakes in individual Rio Tinto operations, but would be
required to seek approval if an investment in convertible
instruments saw it raise its stake in the miner.
Australian Treasurer Wayne Swan last year granted Chinalco
approval to take a stake of up to 14.99% in Rio's London-listed
shares, which would give it an 11% stake in the overall group.
Chinalco gave an undertaking at that time not to raise its stake
beyond this level without receiving fresh approval from the
Australian government.
Rio Tinto has announced a range of measures to allow it to pay
down some of the US$38.9 billion in debt it is carrying from its
2007 purchase of aluminum producer Alcan, including cutting 2009
capital spending by US$5 billion and cutting 14,000 jobs.
The miner has said it is exploring a range of options to allow
it to make good on its promise to pay down US$10 billion worth of
debt in 2009, including a possible equity issue.
Fears that Rio may be forced into a major rights issue
intensified last week after rival mining house Xstrata PLC (XTA.LN)
carried out a heavily discounted US$5.9 billion rights issue to
shore up its balance sheet.
These fears were dampened last week when Rio got its stalled
divestment program underway with a US$1.6 billion sale of South
American assets to Companhia Vale do Rio Doce, or Vale (RIO).
Morgan Stanley analyst Craig Campbell said the prospect of a big
cash injection from China would go even further toward easing
investor fears over a rights issue.
"Depending on the level of asset sales they achieve...this could
go a very long way to relieving the negative pressure that has been
applied," he said.
News of the talks with Chinalco boosted Rio shares, which were
up 2.4% at A$43.17 at 0004 GMT, while rival mining giant BHP
Billiton Ltd. (BHP) was down 3.2% in a broader Australian market
that fell 1.6%.
Chinalco is China's biggest aluminum producer but is
diversifying into other commodities, and Campbell said potential
minority investments in Rio operations could be anywhere across the
miner's global suite of assets.
Rio has held talks with Chinalco in the past about possibly
cooperating on their neighboring bauxite and alumina projects in
Queensland state.
So it is possible Chinalco could look to take a stake in Rio's
Weipa operation in Queensland, which is adjacent to the Aurukun
project of Chinalco's listed unit Aluminum Corp. of China
(2600.HK), or Chalco.
Others have pointed out that Rio has a high level of equity in
its flagship iron ore operations in the Pilbara region of Western
Australia and could look to bring in a minority partner to take on
a structure closer to that of rival Pilbara heavyweight BHP
Billiton.
-By Alex Wilson, Dow Jones Newswires; 61-3-9671-4313;
alex.wilson@dowjones.com
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