Chinalco to Maintain Its Rio Stake in Rights Offering

Chinalco has decided to maintain its status as Rio Tinto’s largest shareholder, its voracious interest in mining resources winning out over crushed feelings.

Last month, Rio Tinto reneged on a $19.5 billion contract with Chinalco for a major share and asset acquisition and decided to raise about $15.2 billion through additional offering. Swallowing its initial outrage, Chinalco will opt to acquire all the shares it is able to purchase for $1.5 billion.

Rio’s additional offering plan in the UK and Australia will be calculated in pounds and AUD, respectively. A detailed plan revealed on June 5 offers an additional 21 shares for every 40 shares at a price of 14 pounds per share in UK and AUD 28.29 per share in Australia. Rio hope to raise $11.8 billion from the British market and $15.8 billion in Australia. 

To maintain its present Rio stake of 9.3%, Chinalco will have to spend about $1.4136 billion for the additional offering. With the yuan/AUD rate changing, Chinalco’s costs are increasing.
 
"This acquisition will help to optimize Chinalco’s interest," said Chinalco Vice-General Manager Lu Youqing. Chinalco GM Xiong Weiping made a similar statement on June 11.
 
Analysts think it wise for Chinalco to acquire the additional offering and maintain its stake, for that helps it to cut earlier losses. But Chinalco has still not been able to gain a seat on Rio’s board.
 
On January 31, 2008, Chinalco acquired a 12% stake in Rio’s British sector for $14.05 billion, equal to a 9.3% stake in Rio Tinto. This time’s purchasing price is far lower, less than a quarter of the previous one.
 
$1.5 billion is no small sum right now for Chinalco, which is short of funds. Lu Youqing said the company would seek loans from domestic banks, though he mentioned no details. The market has it that the Agricultural Bank of China (ABC) and China Development Bank (CDB) will provide Chinalco with the cash it needs.
 
After Chinalco reached its original deal to inject $19.5 into Rio, it signed a credit agreement with ABC, CDB, the Export and Import Bank of China, and the Bank of China, for a total of about $21 billion from the four banks.

As that Rio contract went down the tubes, Chinalco’s contract with the four banks went with it, but yesterday domestic media quoted an ABC insider saying his bank and CDB would provide Chinalco with financing.

Banks lending to Chinalco, however, will have to pay close attention to Chinalco’s continuing financial situation. With this deal, Chinalco’s investment in Rio will total about $14 billion. Although the current deal helps to offset earlier losses due to the plummet of Rio’s stock price, the total investment loss will still reach billions of dollars. If ore prices remain low for the next several years, and Rio’s share price fails to rebound, Chinalco will come under significant financial pressure. Xiao Yaqing, former general manager of Chinalco, earlier told China Business News that Chinalco might have to sell its Rio Tinto shares at a proper time.

Chinalco itself declared an additional offering plan yesterday, planning to raise as much as 10 billion yuan by issuing one billion shares. The cash raised will be used on the construction of company projects and to supplement the company’s circulating fund.

On May 22, Chinalco issued 10 billion yuan of corporate bonds to finance its copper project.