Rio Tinto and Chinalco tidy up $30b investment dealJamie...

Rio Tinto and Chinalco tidy up $30b investment deal

Jamie Freed
Sydney Morning Herald
February 11, 2009

RIO TINTO and Chinalco of China were yesterday putting the finishing touches on an investment agreement worth up to $US20 billion ($30 billion) to ensure the miner will be able to alleviate concerns over its high debts and asset impairments alongside the release of its annual results tomorrow.

The Herald understands the results will include write-downs on the holding value of the aluminium assets gained through its debt-fuelled acquisition of Alcan in 2007.

For Rio's board to keep its credibility intact after the resignation of its chairman designate, Jim Leng, on Monday, it will be imperative to present a deal with Chinalco that is acceptable to other shareholders.

The two big components involved in the agreement being considered - minority stakes in key assets and a convertible bond - are understood not to have changed, despite calls from institutional investors for the chance to take part in a rights issue to help ease the miner's $US40 billion ($59 billion) debt burden.

Chinalco is poised to buy minority stakes that are closer to the 10 per cent mark than the 49 per cent mark in assets such as Hamersley Iron, the Gove alumina refinery, the Weipa bauxite mine and the Escondida copper mine.

The Chinese company is also seeking a board seat, although it remains unclear whether the Foreign Investment Review Board will approve its request.

It is believed Chinalco would not pull out of the deal if it was unable to appoint a director, but there is some precedent for granting the company a board seat.

Other Australian miners, including the Rio subsidiary Coal & Allied and the zinc miner CBH Resources, have representatives of big Japanese investors on their boards, and the majority of Perilya's board is now comprised of representatives of the Chinese smelter Zhongjin.

Mr Leng's decision to resign after just one board meeting has renewed focus on Rio's recent strategic choices, such as the Alcan purchase and its steadfast refusal to engage in merger talks with BHP Billiton last year.

A UBS analyst in London, Paul Galloway, told clients: "No one has taken responsibility for the Alcan deal, and the management discount continues to grow."

The position of Rio's chief executive, Tom Albanese, may not be secure if the market dislikes any deal with Chinalco.

One potential replacement would be Rio's finance director, Guy Elliott, who The Times of London said had supported Mr Leng's capital raising plan rather than the Chinalco deal. Mr Elliott was the other main internal candidate for the top job after Mr Albanese's predecessor, Leigh Clifford, retired in 2007