chinas $12 billion asset swoop on rio

China's $12bn asset swoop on miner Rio Tinto

Matt Chambers | February 02, 2009
Article from: The Australian

RIO Tinto is thought to be close to selling up to $US8 billion ($12.5 billion) of asset stakes to Chinalco.
China's $12bn swoop on Rio

Rio Tinto is reportedly looking at a $US15 billion combination of asset sales

The deal could give the state-owned aluminium company a strategic foothold in the nation's valuable iron ore, coal and aluminium assets.

The miner is reportedly looking at a $US15 billion combination of asset sales, convertible notes and share issues that would also increase the Chinese giant's stake in dual-listed Rio to greater than the 11 per cent level for which it has Australian government approval.

The deal would be one of China's biggest strategic overseas investments outside the financial sector.

For Rio, the deal is looking like its last chance to avoid a multi-billion-dollar rights issue as investors press chief executive Tom Albanese to move to lighten the company's $US38.9 billion debt.

Talk of the huge potential deal came in unsourced reports in London newspapers at the weekend. The Times said Rio was in talks with Chinalco to sell minority stakes worth $US8 billion in some of its most valuable assets and raise an extra $US1 billion through a share placement.

The Telegraph said the $US15billion combination of sales, convertible notes and equity raising was in front of Rio's board and waiting to be signed off by Beijing.

A $US9 billion rights issue was planned if talks with the Chinese fell through, the reports said.

Rio declined to comment on the stories but the company is understood to be in talks with Chinalco.

Speculation of both a rights issue and Chinalco buying Rio assets had become louder over the past week, as analysts and investors urged Rio to deal quickly with its debt issues.

Swiss miner Xstrata last week rushed out a pound stg. 4.1 billion ($8.8 billion) rights issue in a move seen by many as indicating Rio was on the move with plans of its own.

Rio has been forced into the talks with Chinalco after failing in a plan to sell $US10 billion worth of assets last year to reduce gearing.

China has been widely expected to start moving on Australia's natural resources since the global downturn slashed mine values and left many producers struggling to survive.

The downturn is also expected to weaken previous indications that the Rudd Government has given about limits to foreign ownership.

Chinalco is already Rio's biggest shareholder, having grabbed a 12 per cent stake in the dual-listed miner's London shares in a raid during BHP Billiton's failed $135 billion bid for Rio.

The Telegraph reported that Chinalco was planning to increase its stake in the London shares to 18 per cent and up to 14 per cent of its Australian shares.

While the Rudd Government has not ruled out allowing a greater stake, Wayne Swan has so far only approved the purchase of up to 14.99 per cent of Rio's London shares, which equates to 11 per cent of the whole group.

The asset that would probably be most appealing to China is Rio's vast Pilbara network of iron ore mines, railways and ports in Western Australia.

Rio's operating Pilbara iron ore assets were valued at $US9.9 billion in Rio's first-half profit report last year, but it is thought the miner would be looking for a lot more relative value in any deal with Chinalco.

Last week, Rio made its first big asset sale in more than five months, announcing the $US1.6 billion sale of its Brazilian iron ore assets and Argentine potash. Those assets had a combined book value of less than $US240 million and the sale price was lauded as evidence that decent deals were still available.

"Rio wouldn't be considering any deal like this with the Chinese, if it actually is considering one, unless the price for any assets involved matched the sort of values Rio obtained from Vale last week," an industry source said yesterday.

Other assets that could form part of a deal are Queensland and NSW coal operations, Queensland and Northern Territory aluminium operations and Northern Territory uranium assets.