Chinalco/Alcoa stake in Rio Tinto gives huge boost to markets (Source: Mineweb)

News that Chinese aluminium company Chinalco, in conjunction with Alcoa, has taken a 12 percent stake in Rio Tinto has given a big boost to European stock markets this morning.
Posted: Friday , 01 Feb 2008

LONDON/BEIJING (Reuters) -

China teamed up with U.S. aluminium producer Alcoa to buy a 12 percent stake in Rio Tinto on Friday and said it may make a bid, threatening miner BHP Billiton's efforts to win Rio.

The $14-billion-move by state-owned Aluminum Corp of China's (Chinalco), China's biggest ever investment overseas, comes days before a regulatory deadline on Wednesday for BHP to make a firm offer for Rio or to walk away.

Rio has rejected a 3-for-1 all share offer from BHP, worth about $123 billion at current prices, and analysts have long speculated that China might seek an influence as both companies' biggest customer.

"It has all the appearance of a blocking stake ... It stops anyone going to 100 percent as you can't squeeze minorities out," said Graham Birch, a fund manager at BlackRock, which is a major shareholder in both Rio and BHP.

"It's timed to be a bit of spitting in BHP's soup."

Investment bank Lehman Brothers said it bought the stake in Rio for Chinalco and Alcoa at 60 pounds a share, 21 percent above Rio's closing price of 49.56 pounds on Thursday.

Chinalco and Alcoa said they did not currently intend to make an offer for the whole of Rio, but reserved the right to do so if another party made a firm bid.

Rio shares leapt as much as 16 percent to 57.49 pounds, while shares in Chinalco's unit, Aluminum Corp of China Ltd (Chalco), jumped by more than 15 percent. BHP shares also surged as much as 12 percent.

BHP's current offer for Rio would be the world's second-biggest takeover and create a $310 billion mining giant, assembling a massive controlling force across a range of commodities such as copper, aluminium, iron ore and coal.

SPUR

Analysts were divided whether Chinalco and Alcoa's move would block deter BHP or spur it into making a higher offer.

"The door is still very much open for BHP. 12 percent is not a blocking stake... and 60 pounds a share is equivalent to about 4-to-1 (BHP shares per Rio share) and we think BHP can go up to about 4.5-to-1," said Liberum Capital's Michael Rawlinson.

But Fairfax investment bank's head of resources John Meyer thought the stake could be enough to frustrate BHP.

"Given the market uncertainty over the potential acquisition, 12 percent may well prove to be a significant blocking stake," he said. "If BHP wants this deal to go through, I think they have to offer some cash. I simply don't think cash is available to them."

BHP declined to comment.

"Our acquisition of a significant strategic stake in Rio Tinto Plc today reflects our confidence in the long term prospects for the rapidly evolving global mining sector," Chinalco's President Xiao Yaqing said.

"We have confidence in the fundamental value of the Rio Tinto Group and the management's strong ability to realise that value for shareholders."

Rio said the stake purchase reinforced its position that the current proposal from BHP undervalued it.

Chinalco and Alcoa bought the stake in Rio through Shining Prospect Pts Ltd, a Singapore based entity wholly owned by Chinalco and into which Alcoa has committed $1.2 billion.

The two companies have a long history together. In September 2007, Alcoa sold its stake in Chinalco's Chalco unit for $2 billion -- a $1.8 billion profit on an investment it held since Chalco's 2001 initial public offering.

A source familiar with the situation said China Development Bank, a policy lender that has backed some of the country's biggest overseas acquisitions, led the funding of the purchase.

BHP is being advised by Goldman Sachs, Gresham in Australia, Citigroup, HSBC and UBS, while Morgan Stanley, Rothschild, Macquarie in Australia, Credit Suisse, JP Morgan Cazenove and Deutsche Bank are acting for Rio. Lehman and China International Capital Corp are advising Shining Prospects.
(Additional reporting by Anshuman Daga, Laurence Fletcher and Miyoung Kim in London, James Regan in Sydney and Tony Munroe and Polly Yam in Hong Kong; Writing by Mark Potter; Editing by Louise Ireland)