From Caijing Online

Related  Newscast: Newscast: Chalco to Invest US $ 19.5 Bln in Rio Tinto

The long-expected deal between China's leading aluminum producer, the Aluminum Corporation of China (Chinalco), and Rio Tinto is approaching to an end. On February 12, the Australian mining company announced it plans to receive US$ 19.5 billion from Chinalco through new joint ventures and the issuance of convertible bonds.

However, the deal still needs government approval from China and Australia, as well as Rio Tinto's shareholders.

"The transaction will forge a pioneering strategic partnership," said Rio Tinto in its press statement. Both the boards of Rio Tinto plc and of Rio Tinto Ltd. are recommending the Chinalco deal to shareholders.

Chinalco’s planned investment breaks down into US$ 12.3 billion that would go to aluminum, copper and iron ore joint ventures with Rio Tinto. Chinalco would use another US$ 7.2 billion to buy subordinated convertible bonds in two tranches from Rio Tinto plc and Rio Tinto Ltd. Their conversion prices would be US$ 45 and US$ 60 per share, respectively.

If converted, the bonds would increase Chinalco's holding in Rio Tinto plc to 19 percent, while its share of Rio Tinto Ltd. would grow to and 14.9 percent. The final tally would give the Chinese company about 18 percent of the Rio Tinto Group.

Under the deal, Chinalco would also be entitled to nominate two new non-executive board members to the current, 15-member board of directors at Rio Tinto.

Xiao Yaqing, general manager of Chinalco, said that the partnership with Rio Tinto "is a milestone for Chinalco and a chance to become one of the world’s leading resources companies." It represents Chinalco's confidence in the sustainable development of China's commodity markets, he said.

Paul Skinner, Chairman of Rio Tinto, said in the statement that "Chinalco's cash investment of US$ 19.5 billion will strengthen Rio Tinto’s balance sheet, increase our flexibility to deliver growth as markets recover, and position Rio Tinto for the next decade and beyond." The money is expected to help Rio Tinto reduce its US$ 38 billion debt.

Pending Approval

While the Australian side is now overwhelmingly positive about a Chinalco investment, disagreements have long existed inside Rio Tinto about the deal.

On February 9, Rio Tinto's designate-chairman Jim Leng announced his resignation – less than a month after he was appointed to the position. It is widely believed that Leng's departure was triggered by his objections to the Chinalco deal.

His resignation has stirred market concerns over whether the transaction will be able to win approval from Rio Tinto's shareholders.

In recent interviews with the business media, several of Rio Tinto's institutional investors said they not categorically opposed to a deal with Chinalco, but they will consider the details of the transaction when they go to cast their vote.

The deal has also churned up concern about China’s expansion into Australia’s resource sector, and government approval may yet prove an insurmountable hurdle.

In August 2008, Australian Treasurer Wayne Swan gave his approval for Chinalco to hold up to 14.99 percent of Rio Tinto plc, under the stipulations that the Chinese company would not increase its stake without a government permit, and that it would not send a board member to Rio Tinto before its stake exceeded 15 percent.

In an interview February 12, Swan didn't comment on Chinalco's upcoming acquisition of Rio Tinto, but said the deal would be reviewed according to the newly issued foreign investment guideline.

If the deal goes successfully, it will be the largest overseas investment made by a Chinese enterprise.

Chinalco is already Rio Tinto's largest shareholder after acquiring 12 percent in 2008. The new transaction would increase its total investment in Rio Tinto to US$ 33 billion.

Full article in Chinese: http://www.caijing.com.cn/2009-02-12/110055453.html