Rio-Chinalco deal clears its first hurdle

Australia’s competition regulators aren’t objecting to a US$19.5 billion investment in Rio Tinto (RTP-N, RIO-l) from Aluminum Corp. of China (ACH-N), or Chinalco, Reuters reported today.

The Australian Competition and Consumer Commission concluded that Chinalco and Rio Tinto “would be unlikely to have the ability to unilaterally decrease global iron ore prices below competitive levels,” the news agency quoted the commission as saying.

Reuters said the deal still requires approval from Australia’s treasurer, however. His decision will be based on the national interest and will rely on the views of Australia’s Foreign Investment Review Board. The board will make a recommendation by the end of June.

In making its ruling, the country’s Competition and Consumer Commission weighed whether Rio would be influenced by Chinalco to cut iron ore prices to benefit China’s steelmakers. (Chinalco and China’s still mills are all government subsidiaries.)

It also looked at whether a relationship between the two companies would affect commodities in Australia such as bauxite, alumina and copper.

Under the proposed tie-up, Chinalco will invest US$19.5 billion in Rio Tinto through joint ventures and convertible debt in a deal that will help the Anglo-Australian mining giant pay down debt and pursue investment opportunities.

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.

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 Melbourne-based 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.

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.

At presstime in New York, Rio Tinto was trading at US$129.36 per share. It has a 52-week trading range of US$59.20-$558.65 per share.

Chinalco was trading at US$16.36 per share and has traded over the last year in a range of US$7.22-$47.95 per share.