Chinalco Pumps US$19.5B Into Rio Tinto

China’s largest aluminum producer will invest US$19.5 billion in Rio Tinto (RTP-N, RIO-L) through joint ventures and convertible debt in a deal that will help the Anglo-Australian mining giant pay down debt and pursue investment opportunities.

State-owned Aluminum Corp. of China (ACH-N) (Chinalco) will pay US$12.3 billion in cash for stakes of up to 50% in nine of Rio Tinto’s mining assets and will also pay US$7.2 billion in cash for bonds that are convertible into shares.

At a time when financial markets are distressed, the gigantic cash infusion “will strengthen Rio Tinto’s balance sheet, increase our flexibility to deliver growth as markets recover and position Rio Tinto for the next decade and beyond,” Rio Tinto’s chairman, Paul Skinner, said in a statement.

If Rio Tinto’s shareholders approve the deal, Chinalco will hold a 30% investment in Weipa, Rio Tinto’s 100%-owned bauxite mine in Queensland, Australia; 50% in Yarwun, its 100%-owned alumina refinery in Gladstone, Queensland; and 49% of Rio’s share of Boyne Island Smelters, an alumina smelter, also in Queensland, and the Gladstone Power Station, a captive power plant.

The transaction will also give Chinalco, China’s third-largest copper producer, a 49.75% investment in Rio Tinto Escondida, which owns 30% of the Escondida copper mine in Chile’s Atacama desert and is operated by BHP Billiton (BHP-N, BLT-L, BHP-A); a 30% investment in Rio Tinto Indonesia Holdings, part owner of the Grasberg copper-gold mine in Indonesia; a 30% indirect interest in the La Granja copper development project in northern Peru; and a 25% interest in Kennecott Utah Copper, a copper mining, smelting and refining company in the U.S.

And Chinalco will take a 15% stake in Rio Tinto’s 100%-owned Hamersley Iron, which owns about 700 km of dedicated railway, and port and infrastructure facilities at Dampier in Western Australia.

On top of the joint ventures, the two companies will set up a project development fund “to exploit project opportunities” in aluminum, copper and iron ore in China and Australia.

Chinalco will be entitled to nominate two directors to the Rio Tinto boards as long as it holds at least 14.9% of Rio Tinto’s aggregate publicly held share capital.

The US$7.2 billion in convertible debt will be issued in two tranches with conversion prices of US$45 and US$60 in each of London-listed Rio Tinto PLC and Melbournebased Rio Tinto Ltd. If converted, the convertible bonds would raise Chinalco’s current stake to 19% in Rio Tinto PLC and to 14.9% in Rio Tinto Ltd., or a total of 18% in the Rio Tinto Group.

Clarke Wilkins, an analyst at Citi Investment Research, said in a note to clients that he believed “the Chinalco package at a premium to net present value (NPV) in a difficult environment is preferable to discounted assets sales and/or rights issue,” adding that approval of the deal “will be political” but “not a stumbling block.”

Proceeds from the multibillion package will be used to invest in key projects, as well as to meet Rio Tinto’s US$8.9-billion debt obligation this year and its US$10-billion debt obligation next year.

Chinalco is entitled to a US$195- million break fee if Rio Tinto’s board withdraws or changes its recommendation.