Rio Tinto Ltd. (RTP) may turn to China to help pay down some of
its US$38.9 billion debt, with the miner announcing it is in talks
with Aluminum Corp. of China, or Chinalco, over a possible
investment.
The Anglo Australian miner said Monday it has held talks with
state-backed Chinalco over the possible sale of minority stakes in
some of its mining operations and an investment in convertible
instruments.
The news has been 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."
Rio Tinto declined to comment on the potential value of the deal
but there have been newspaper reports it could be between US$9
billion and US$15 billion.
A deal of this size would ensure Rio could meet its debt
repayments this year without having to resort to a rights
issue.
Chinalco Deputy General Manager Lu Youqing confirmed the group
is in talks with Rio Tinto on "possible areas of cooperation".
"They are talking to a lot of people," Lu told Dow Jones
Newswires.
"There has been some interaction between us. There have been
some conversations on possible areas of cooperation."
Lu declined to specify whether the discussions centered on
Chinalco raising its stake in Rio Tinto, adding that the miner has
been the initiator in making public announcements on this
issue.
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 further 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 eased slightly on Friday when Rio got its stalled
divestment program back 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 closed
up 5.5% at A$44.45 while rival mining giant BHP Billiton Ltd. (BHP)
ended own 1.6% in a broader Australian market that fell 1.2%.
Chinalco is already Rio's biggest shareholder after it teamed up
with Alcoa (AA) last year to pay US$14.1 billion for a 9% stake in
the miner, and the Chinese group 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 beyond certain
thresholds.
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.
Asked about the prospect of Chinalco upping its stake, Swan said
Monday that the government's attitude to Chinese investment in
Australian miners has not changed.
"We welcome foreign investment," he told reporters.
"We have a set of guidelines and there is a national interest
test with those guidelines."
Chinalco is China's biggest aluminum producer but is
diversifying into other commodities, and Morgan Stanley's 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 Ltd.
(2600.HK), or Chalco.
Others have pointed out that Rio has 100% equity in its flagship
Hamersley iron ore operations in the Pilbara region of Western
Australia state 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 (Chuin-Wei Yap in Beijing and Rachel
Pannett in Canberra contributed to this story)
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