The Aluminum Corp of China (Chinalco, 中國鋁業), one of the world’s biggest aluminum producers, agreed to invest US$19.5 billion yesterday in global miner Rio Tinto Group in the country’s biggest overseas investment so far.
As part of the deal, Chinalco and debt-laden Rio Tinto said the Chinese company agreed to invest US$12.3 billion in joint ventures in aluminum, copper and iron ore mining.
“This strategic partnership represents a key step in Chinalco’s development into one of the world’s leading natural resources companies,” Chinalco president Xiao Ya-qing (肖亞慶) said in a statement.
Chinalco’s investment is a tremendous boost for London-based Rio Tinto, which is aiming to pay back about US$10 billion of its US$38 billion debt mountain by the end of this year by axing some 14,000 jobs worldwide, selling assets and cutting capital spending.
Last November, rival miner BHP Billiton canceled its US$68 billion bid to take over Rio Tinto, citing the latter’s debt as a major risk.
The agreement will give the Rio Tinto greater access to China’s market, where demand for raw materials has soared in recent years, chairman Paul Skinner said.
“We have long recognized and welcomed the growing participation of China in the global economy,” Skinner said. “We believe this transaction is a logical step in advancing our capability in the Chinese market.”
The issue of US$7.2 billion of convertible bonds to Chinalco could almost double, to 18 percent, Chinalco’s existing 9.3 percent stake in Rio Tinto Group. That investment resulted from the purchase last year, with Alcoa Inc, of a 12 percent stake a year ago in Rio Tinto PLC, the company’s London-listed unit.
The deal, coming at a time when China’s economy is being squeezed by the global economic crunch, reflects Beijing’s determination to line up future resources for key industries.
“Our objectives are to seek commodity and geographic diversification, with a view to achieving long-term financial returns from our investments,” Xiao said.
Rio Tinto also announced yesterday that its net profit plunged 50 percent to US$3.7 billion, largely due to impairments that mainly were writedowns related to the group’s aluminum business.
Earlier this week, Rio Tinto’s chairman-elect Jim Leng quit less than a month after being named to the board of the debt-laden mining giant, reportedly due to disagreements over the deal with Chinalco. Rio Tinto has not provided an explanation for Leng’s sudden departure.
Skinner remains Rio Tinto’s chairman for now.
He cast the deal as a “clear of vote of confidence” in the company’s prospects and the outlook for commodities.
“The deal meets the two sides’ interests. Chinalco has plenty of cash, while Rio Tinto needs the capital injection to get through tough times,” said Li Huazheng, an analyst at Shanghai Securities, in Shanghai.
“At the same time, Chinalco can get access to resources that it has dreamed of having for a long time,” Li said.
Rio Tinto’s shares were suspended yesterday pending the announcement.
Chinalco is not immune to crashing commodities markets and slumping demand: it recently reported that its net profit for last year probably fell 50 percent from a year earlier, to less than 5 billion yuan (US$732 million).
But like many big state companies it has a massive cash reserve thanks to recent boom years and its 2007 share offering in Shanghai.
A statement by Rio Tinto said the deal entitles Chinalco to nominate two non-executive board members to join the company’s 15 member board.
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