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Rio deal off; Chinalco seeks other acquisitions

By Jiang Wei (China Daily)
Updated: 2009-06-06 08:18

"Sorry," Rio Tinto told its would-be Chinese investor on Friday. "No deal now."

The Aluminum Corp of China (Chinalco) confirmed the collapse of a deal to invest $19.5 billion in the Anglo-Australian mining company, with general manager Xiong Weiping saying he was "very disappointed".

The world's third largest mining company will now pay Chinalco $195 million as compensation for termination of the deal.

It would have been the largest overseas acquisition deal by a Chinese company after China National Offshore Oil Corp's bid for California-based Unocal in 2005, which was blocked, too.

But despite the discouraging outcome, Chinalco will continue to look for investment opportunities outside the Chinese mainland, Xiong said. "Although the Rio Tinto deal has fallen through, Chinalco's strategic aim of building an international multi-metal mining company will not change."

Rio Tinto now seeks to raise $21 billion from a share sale and an iron ore joint venture with BHP Billiton, its rival Australian company, to solve its financing problems. The company said on Friday that it would raise $15.2 billion in a share sale in a 50-50 joint venture with BHP Billiton, and get $5.8 billion from its rival to equalize their contributions.

Chinalco would have invested $12.3 billion in joint investments in aluminum, copper and ore mining with Rio Tinto, and spent $7.2 billion on convertible bonds in the company. If redeemed for shares, the bonds would have almost doubled Chinalco's existing 9.3 percent stake in the Rio Tinto Group to 18 percent.

Related readings:  Chinalco confirms deal breakup with Rio Tinto  Steel mills say no to Rio cuts  Rio cuts key iron ore prices by 33%  Rio to sell stake in China JV  Rio to sell aluminum JV stake to Zhongjin

Geng Nuo, analyst with Shenzhen-based brokerage firm Great Wall Securities, said the deal's failure "is a setback for Chinalco's expansion strategy, but it is not expected to hurt its overseas investment strategy in the long run".

Chinalco's loss, however, has not come as a major surprise to Peng Bo, analyst with another Shenzhen-based brokerage Guosen Securities, because the international non-ferrous metal market has been showing signs of recovery.

"The Chinalco offer came in February when prices of most non-ferrous metals had hit the bottom," Peng said. "Rio Tinto can afford to go back on its words now that the market has turned around."

Though Treasurer of Australia Wayne Swan said the aborted deal was a commercial matter for the private sector and did not concern the government, some observers argued Rio Tinto might have been under political pressure not to tie up with Chinalco.

Wang Zhile, a specialist in foreign investment, said the pressure in Australia was quite remarkable. Opponents ran commercials on TV asking the Australian government to block the deal. Some Rio Tinto shareholders even alleged that the deal favored the State-owned Chinese company.

"Some may argue that blocking the deal was good for a country's economic security but in this era of globalization investing in each other's companies would give countries a much greater sense of security," Wang said.