Rio Tinto sells $19.5 billion in assets to China

By Sonali Paul and Eric Onstad

MELBOURNE/LONDON (Reuters) - Chinese state-owned aluminum group Chinalco will invest $19.5 billion in miner Rio Tinto in a deal that will secure resource supplies for China and help cut Rio's heavy debt but also raise regulatory scrutiny.

Rio shares in London tumbled as much as 18 percent on Thursday as investors worried Rio was giving up too many stakes in prime mines and also not allowing all shareholders to participate in the fund raising.

As part of the biggest overseas investment by a Chinese company, Chinalco will spend $12.3 billion on stakes of up to 50 percent in nine of Rio's mining assets.

It will also buy $7.2 billion of bonds convertible into shares of the world's largest aluminum maker, second-largest iron ore miner and a top-five copper producer.

"People think they're giving too much away basically. From the Rio shareholder point of view, I guess you're going to have to vote for it, because otherwise the company is in dire, dire straights, but it's not ideal," said analyst Nick Hatch at ING in London.

Rio shares pared losses, but were down 3.2 percent at 1,906 pence at 1604 GMT, against a 3.4 percent loss in the UK mining index.

Rio's shares are down by around a fifth since rival BHP Billiton scrapped its $66 billion hostile offer in November, hit also by investor concern over Rio's $39 billion debt load, taken on when it bought Canadian firm Alcan in 2007.

Chinalco, the parent of listed Aluminum Corp of China Ltd (Chalco), will potentially double its stake in Australia and London-listed Rio to 18 percent, Rio said, denying it was selling out its independence to China.

"We are very disappointed that Rio Tinto has decided to over-ride our clients' pre-emption rights and issue attractive equity to one shareholder without offering it to all shareholders," said Robert Waugh, head of UK equities at Scottish Widows Investment Partnership.

"We will be engaging with the board with a view to protecting our clients' interests."

Scottish Widows has 12.8 million shares or 1.3 percent in the London arm of Rio, Reuters data showed.

CLOSE SCRUTINY

The plan is likely to face close scrutiny from the Australian government, which wants to ensure investments by foreign state-owned entities do not come with political or strategic strings.

Shortly before Rio's announcement, Australian Treasurer Wayne Swan said the government would immediately tighten foreign ownership laws by treating convertible debt as equity.

Chinalco President Xiao Yaqing told reporters that he had been aware of the proposed change and did not see Swan's announcement as a negative signal.