Chinalco to Buy More of Rio Tinto as China’s Commodity Grab Accelerates

By Don Miller
Associate Editor
Money Morning

Rio Tinto PLC (ADR: RTP), the world's third-largest mining company, may raise as much as $15 billion from top shareholder Aluminum Corp. of China (ADR: ACH), also known as Chinalco, potentially making it the latest in a series of deals that has seen the Asian giant establish a global network of commodities suppliers.

Rio is looking at a combination of asset sales, convertible notes and equity stakes that would lift Chinalco's Rio stake to more than 11% from 9 % now, the British company said in a statement yesterday (Monday). The money from the sale would be used to reduce some of Rio Tinto's $38.9 billion of debt, Bloomberg News reported.

The news comes on the heels of a report last week by Money Morning that Chinalco had authorized a special team of analysts to watch for an opportunity to increase its stake in Rio to the maximum 14.99% permitted by the Australian government.

Rio Tinto Chief Executive Officer Tom Albanese, who rejected a $66 billion takeover offer from BHP Billiton Ltd. (ADR: BHP), is studying the sale after commodity prices last year took their biggest plunge most in more than five decades. Rio's debt ballooned nearly 20-fold with its buyout of Alcan Inc. two years ago.

Over the past few months, China has capitalized on the financial turmoil that has paralyzed the world's "developed" economies by stocking up on cheap commodities, weeding out competition to its largest state-run companies, and acquiring even more foreign assets.

With commodity prices in a historic swoon, China is scouring the planet for the natural resources it needs to advance its recently unveiled $586 billion stimulus plan - a plan primarily focused on infrastructure.

In order to execute a massive infrastructure overhaul, China is using its huge stash of foreign reserves to load up on the raw materials crucial to the endeavor. Now that prices have gone down, China's commodities stockpiles are going up.

Imports of copper, iron ore, and oil all rose in December.  Iron ore imports were up 6.2%, copper imports were up 19.3%, and imports of crude oil climbed 11.6% on a year-over-year basis.

And imports are just one way China is scooping up natural resources in support of its stimulus plan. 

The government has encouraged large Chinese companies to go outside and buy resources companies while the commodity market is low.

"It is the best outbound acquisition timing for Chinese resources buyers from now on till next year," an anonymous Chinese government advisor told the Financial Times.

So, the Red Dragon is loading up on foreign companies with substantial metal and mineral assets while prices are cheap.  Expanding its foothold in Rio to gain access to its iron ore, aluminum, copper and other assets fits nicely with the government's agenda.

"China is short of copper, alumina and iron ore and they are the commodities they would look to acquire," Glyn Lawcock, head of resources research at UBS AG (UBS) in Sydney told Bloomberg. "Buying them now at good prices, knowing they are 20- plus year mine life assets, this is a once-in-a-lifetime opportunity for China."

Specifically, Chinalco may want to buy stakes in Rio's Gove or Queensland Alumina operations in Australia, the Escondida copper mine in Chile or Coal & Allied Industries, Ltd., Lawcock said. It may also be interested in Rio's iron ore unit,

For its part, Rio is looking to reduce close to $39 billion in debt, linked to its acquisition of the Canadian aluminum group Alcan in late 2007.  Rio made the deal when commodity markets still appeared immune from the global financial meltdown and as BHP Billiton was mounting a hostile takeover bid for Rio.

BHP abandoned the hostile bid in November, citing Rio's high-level of debt and collapsing commodity markets.

"Rio bought an asset at the top of the market, took on too much debt and now they're paying for it," said Brad Shallard, who manages the equivalent of $19 million in shares including Rio stock for Katana Capital Ltd. in Perth. "Chinalco would have the whip hand in any deal."

Chinalco bought a 9% interest in Rio with Alcoa Inc. (AA) last year, paying about $14 billion to become its top shareholder. Since then, the investment has lost around 75% of its value.

Rio has said it hopes to pay off about $10 billion of debt this year by cutting costs, axing 14,000 jobs, and selling businesses. So far, it has sold or is selling around $4.7 billion worth of assets

"Raising money would alleviate the debt monkey off their back," Lawcock said.   "If they can get a decent asset sale away to the Chinese and raise $5 billion then that would be extremely positive."

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