Chinalco to invest $19.5 billion in Rio Tinto

[February 12, 2009]  SHANGHAI, China (AP) -- Aluminum Corp. of China, one of the world's biggest aluminum producers, agreed Thursday to invest $19.5 billion 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 $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's president, Xiao Yaqing, said in a statement.

Chinalco's investment is a huge boost for London-based Rio Tinto, which is aiming to pay back about $10 billion of its $38 billion debt mountain by the end of 2009 by axing some 14,000 jobs worldwide, selling assets and cutting capital spending.

In November, rival miner BHP Billiton canceled its $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, said Chairman Paul Skinner.

"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 $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 2008 purchase, 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 Thursday that its net profit plunged 50 percent to $3.7 billion (5.6 billion Australian dollars), 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.

The company has not provided an explanation for Leng's sudden departure.

For now, Rio Tinto's incumbent chairman, Skinner, remains. 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 Thursday pending the announcement.

The news lifted Chinalco's Shanghai-traded shares, which jumped 5.6 percent Thursday to 10.49 yuan. But shares in the companies Hong Kong-listed unit, Chalco, fell 4.8 percent to 4.19 Hong Kong dollars on profit-taking following recent gains fueled by speculation over the deal.

Chinalco is not immune to crashing commodities markets and slumping demand: it recently reported that its net profit for 2008 probably fell 50 percent from a year earlier, to less than 5 billion yuan ($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. As of June 2008, it reported 377.7 billion yuan ($55.2 billion) in total assets.

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.

Rio Tinto will retain operational control of the joint ventures, with the Chinese company holding a maximum stake of 50 percent, in the Yarwun, Australia, aluminum mine. Stakes in other joint ventures will range between 15 percent to 49 percent, it said.

[Associated Press; By ELAINE KURTENBACH]

AP Business Writer Jeremiah Marquez in Hong Kong and Associated Press researcher Ji Chen in Shanghai contributed to this report.

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