rumour is baseless big dump on the way

Chinalco chatter fuels BHP surge

May 15, 2008

BHP Billiton shares have been carried to record levels on renewed speculation China's state-owned aluminium group, Chinalco, is planning to lead a $US25 billion sharemarket raid for a 10% interest to match the $US15 billion stake it has snared in BHP takeover target Rio Tinto.

Shares in BHP surged $2.78, or 6%, to $48.56, taking its market value to $US250 billion ($A259 billion). That increase and earlier speculation that BHP could be considering a cash sweetener to its 3.4-for-1 scrip offer for a reluctant Rio took Rio shares $6.60, or 4.5%, higher to $151.10.

Shares in both companies climbed in early London trade last night on the continuing talk that Morgan Stanley would enter the market for BHP stock at prices above $60 a share.

Sources close to Morgan Stanley dismissed the rumour as baseless.

The regular renewal of the China raid on BHP has become a source of major frustration for Rio in its battle to convince the market it was right to dismiss BHP's proposed 3.4-for-1 scrip offer as a low-ball bid.

Even so, the BHP bid ratio swings back in Rio's favour every time the cash sweetener rumour surfaces. This time, the cash sweetener rumour was quickly followed by the resurfacing of the China rumour.

The proposed offer - it remains conditional on BHP gaining antitrust clearance - now values Rio shares at $165.10, a premium of $14 a share, or 9.2%, to Rio's closing price.

BHP chief executive Marius Kloppers said last week there was no doubt Chinese interests would one day show up on the group's register.

But he stopped well short of giving any credence to the rumour of a China raid. That was also the case yesterday in an interview on CNBC Asia after his presentation to an investment conference in Florida.

He was asked if he had heard from Chinalco "in terms of that company taking a stake in your company".

"You know we don't comment on things like that," he said. "(It's) very difficult for us to make specific statements but, you know, certainly we've heard the same rumours over the last couple of days, as you have."

Mr Kloppers was also asked about the potential for BHP to sweeten its Rio offer.

He argued that, with record oil prices fuelling a strong BHP share price, there had been an effective increase in the value of the offer.

"And that should be very attractive to the Rio Tinto shareholders," he said.

Chinalco's February raid on Rio netted it a 9% stake and forced BHP to reduce the minimum acceptance condition from 90% to 50.1%. The Chinalco raid was done in partnership with US aluminium group Alcoa. They have argued that it was a straight investment.

Others have suggested Chinalco was operating under orders from Beijing to do what it could to thwart BHP's takeover ambitions because the BHP-Rio combination would yield pricing power in the key commodities China needs for its industrialisation and urbanisation boom. There were also suggestions that the Chinalco raid was simply aimed at securing aluminium assets that BHP would be expected to discard after completing the merger.

Whatever the motives, the continued speculation has put the Federal Government on high alert, with a warning to Beijing that state-backed investments in leading Australian companies will be subject to greater scrutiny and tighter thresholds than independent deals.