Rio Tinto confirms Chinalco's $19.5 billion investment
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Rio Tinto confirmed on Thursday that Aluminum Corp. of China will invest $19.5 billion in the mining group, a move that Rio hopes will help it pay down debt, but that is likely to set off opposition from politicians worried about the Chinese group's influence on the miner.
Under the deal, Aluminum Corp. of China, known as Chinalco, will take stakes in various Rio assets for a total of $12.3 billion and buy $7.2 billion of convertible bonds, which will allow the Chinese company to secure supplies of raw materials at a time when asset prices are depressed because of the global economic slowdown.
For Rio, the deal means a much-needed cash injection at a time when profits are sagging along with lower prices for raw materials.
Rio said in a statement accompanying its earnings release Thursday that the deal "raises significant funds at a time when financial markets are distressed, materially reducing Rio Tinto's indebtedness, strengthening its balance sheet and increasing its flexibility to pursue attractive investment opportunities throughout the cycle."
Rio Tinto, which is based in London, needs to raise money to reduce $39 billion of debt amassed through its 2007 purchase of the Canadian aluminum maker Alcan. About $9 billion of debt is due for repayment in October. Rio has already started to sell assets, cut almost 13 percent of jobs, reduced capital spending plans and considered a rights issue to repay debt.
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"Rio needs to meet debt reduction targets, while the general intent of Chinese industry is to have to get a handle on supply of raw materials," said Simon Toyne, an analyst at Numis in London.
However, the investment by Chinalco, which was already Rio's biggest shareholder prior to Thursday's announcement, is not without controversy.
Discussions about the potential deal led to the departure of the chairman-elect, Jim Leng, this week, barely four weeks after his appointment, amid disagreements over how to reduce the company's debt.
Some analysts previously raised concern about a deal with Chinalco, saying that Rio Tinto risks upsetting its loyal investor base by seeking investments from China instead of offering shares to all investors, especially after Rio Tinto's stock fell 62 percent over the past 12 months.
A larger investment by Chinalco would also act as a "poison pill" deterrent to a takeover, limiting the company's room to maneuver and therefore increasing the risk for shareholders, according to a Merrill Lynch analyst report on Feb. 3.
Rio Tinto might also be better advised to hold on to its valuable assets to benefit once demand for raw materials recovers rather than selling them at discounted prices, some analysts said.
Rio sought to address some of these concerns Thursday, stressing that although Chinalco would be entitled to nominate two new non-executive board members to add to Rio's 15 current board members, "independent non-executive" directors will continue to make up a majority of the Rio Tinto boards.
In addition, Rio said it "retains operational control of the joint venture assets, with clear governance arrangements and continued commercial marketing of joint venture product while maintaining its commitment to best practice and sustainable development."
As the biggest consumer of iron ore, China is always fighting on behalf of its steel producers to get a good deal on iron ore prices. A recession and falling demand for steel from American automakers lowered the prices for the material and prompted mining companies to reduce production.
The effects of the economic downturn elsewhere provides China, whose demand for steel and iron ore is likely to remain high as the government pumps more than $580 billion into the economy, with an opportunity to expand its control over the resources before raw material prices recover.
Bettina Wassener reported from Hong Kong and Julia Werdigier reported from London.
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