Chinese Buying some Rio assetsRio May Sell Stake to Chinalco to Raise Funds; Shares Advance
By Rebecca Keenan and Xiao Yu
Feb. 2 (Bloomberg) -- Rio Tinto Group, the world’s third-largest mining company, advanced in London trading after saying it may raise cash from Aluminum Corp. of China to reduce $38.9 billion of debt.
Aluminum Corp., also know as Chinalco, may buy debt that can be converted into Rio shares and minority stakes in some units, the London-based company said today in a statement. The sales may raise as much as $15 billion, the Sunday Telegraph reported yesterday. Rio increased as much as 6.8 percent on the London Stock Exchange.
Rio Chief Executive Officer Tom Albanese, who rejected a $66 billion takeover offer from BHP Billiton Ltd., is studying a share sale after commodity prices plunged the most in more than 50 years in 2008. Rio’s debt ballooned 19-fold after the purchase of Alcan Inc. two years ago.
“Raising money would alleviate the debt monkey off their back,” said Glyn Lawcock, head of resources research at UBS AG in Sydney. “If they can get a decent asset sale away to the Chinese and raise $5 billion then that would be extremely positive.”
Rio rose 68 pence, or 4.5 percent, to 1,574 pence as of 8:18 p.m. in London, valuing the company at 24.8 billion pounds ($35.3 billion). The stock has declined 36 percent since Nov. 24, the day before Melbourne-based BHP said it abandoned its bid.
Chinalco, which is based in Beijing, is in “initial talks” to buy assets from Rio, the state-owned company’s Vice President Lu Youqing said by phone from Beijing today. “There is no certainty of an agreement with Rio because Rio is also talking to other people,” he said.
State Approval
Any agreement would need government approval and depends on the prices, he said, declining to give details on the assets. Lu wouldn’t comment on plans by the Chinese company to increase its stake in Rio.
Chinalco had as much as 60 billion yuan ($8.8 billion) of cash, Lu said in November.
Chinalco’s publicly traded unit, Aluminum Corp. of China Ltd., or Chalco, fell 5.6 percent to close at HK$3.40 ($0.44) in Hong Kong.
Chinalco may seek loans from state-owned banks and other channels to finance the purchase should there be an agreement, Lu said today. China Development Bank Corp. funded Chinalco’s purchase of 9 percent stake in Rio last February.
Chinese Deals
Calls to China Development Bank’s spokeswoman Yang Hua were not immediately answered.
Chinese companies offered at least $18 billion last year to buy mining assets globally, taking advantage of the global financial crisis that slashed valuations. Sinosteel Corp., China’s second-largest iron-ore trader, acquired Australia’s Midwest Corp. last year for A$1.36 billion ($860 million) to secure supplies.
China may want to buy stakes in Rio’s Gove or Queensland Alumina operations in Australia, the Escondida copper mine in Chile or Coal & Allied Industries Ltd., UBS’s Lawcock said. It may also be interested in Rio’s iron ore unit, he said.
“Strategically, the purchase of Rio assets such as copper, iron ore will benefit Chinalco as China is lacking all of these materials and demand will be sustainable,” said Heng Kun, a Shanghai-based analyst at Essence Securities. “It’s a good opportunity to buy now as they are cheap.”
Spending Cuts
Rio, forced to cut spending by half and eliminate 14,000 jobs to counter the global recession, had its market value fall below its debt in December. Rio has a net debt- to-shareholders’ equity ratio of 126 percent, compared with BHP’s ratio of 22 percent and a ratio of 22 percent for Anglo American Plc, the world’s second-largest mining company, according to Bloomberg data. BHP has net debt of $6.3 billion.
“Rio bought an asset at the top of the market, took on too much debt and now they’re paying for it,” said Brad Shallard, who manages the equivalent of $19 million in shares including Rio stock for Katana Capital Ltd. in Perth. “Chinalco would have the whip hand in any deal.”
The Chinese company won approval from the Australian government in August to increase its stake in Rio to 11 percent. Calls to Australian Treasurer Wayne Swan’s office seeking comment on whether the government would allow Chinalco to hold a greater stake in Rio weren’t returned.
Increased Stake
Chinalco may increase its holding in Rio’s London- listed shares to 18 percent and buy 14 percent of the company’s Australian-listed shares under the plan, the Sunday Telegraph reported yesterday.
“China is short of copper, alumina and iron ore and they are the commodities they would look to acquire,” said Lawcock at UBS. “Buying them now at good prices, knowing they are 20-plus year mine life assets, this is a once-in- a-lifetime opportunity for China.”
Rio has sold $4.6 billion of assets since announcing an asset sale program. It agreed last week to sell a potash project in Argentina and the Corumba iron ore mine in Brazil to Cia. Vale do Rio Doce. Rio may be able to make a $4.4 billion debt repayment this year after selling the assets, JPMorgan Chase & Co. said in a Jan. 30 report.
To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Xiao Yu in Beijing at yxiao@bloomberg.net.