Chinalco eventually gets what it wants from Rio Tinto

Chinalco eventually gets what it wants from Rio Tinto
Chinalco is making good on Rio Tinto.

By Una Galani, breakingviews.com
Last Updated: 3:05PM GMT 12 Feb 2009

One year since its audacious dawn raid, the Chinese state-owned aluminium group is set to double its stake in the Anglo-Australian miner. Chinalco overpaid back then, but the holding made sure it was first port of call for a proposed $20bn (£14bn) rescue package for Rio.

In the new deal, the Chinese have agreed to buy US$7.2bn of convertible bonds, at face value, and spend $12.3bn on stakes of up to 50pc in a number of Rio's mining assets. If the bonds are converted into shares, Chinalco would double its total stake in the dual-listed miner to 18pc and get to nominate two directors to Rio's board.

The new investment helps dull the financial pain of buying at close to the peak of the market. Last year it paid $85 a share, based on current exchange rates. It is hard to translate the value of the mine interests into a Rio share price, but people close to the situation suggest the equivalent price for the new proposed investment package is more than $50 a share. That is well above Rio's current $27 share price, but this is meant to be a long-term investment.

Indeed, Chinalco didn't get into Rio merely in search of a financial return. The original investment was widely considered a spoiler for rival BHP Billiton's proposed merger with Rio. The Chinese authorities were openly hostile to a deal that would have created a much more powerful supplier of iron ore and other key commodities. The move by state-owned Chinalco probably helped scupper the plan.

China may be suffering now, but it will always be hungry for commodities. There is no better way to keep prices down than to keep supply ample. Chinalco's latest deal will put the country in a position to do exactly that. Providing the transaction doesn't get blocked by Rio's frustrated shareholders or the Australian foreign investment board, Chinalco will have extracted what it really wanted.

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http://www.telegraph.co.uk/finance/newsbysector/energy/4601828/Chinalco-eventually-gets-what-it-wants-from-Rio-Tinto.html