Rio chairman-elect quits over Chinalco deal

By Sonali Paul and Alfred Cang

MELBOURNE/SHANGHAI (Reuters) - Rio Tinto Ltd/Plc (RIO.L) director Jim Leng has quit and will not become chairman as had been planned after objecting to a potential deal with the mining group's top shareholder, state-run Chinese aluminum maker Chinalco.

The departure of Leng, deputy chairman of India's Tata Steel (TISC.BO), likely opens the way for Rio to seal a deal with Chinalco, analysts said. Leng was named as Rio's (RIO.AX) next chairman just over three weeks ago.

Leng said in a statement he resigned following a dispute over how to cut Rio's heavy debt load of around $39 billion.

"As the company previously stated, it has a financial issue to resolve in terms of its debt and repayment and there has been a difference of opinion over which option the company should pursue. I am hopeful that my resignation will enable the board to reach a consensual decision," he said.

Last week, Rio said it had held talks with Chinalco, China's largest aluminum producer, about selling it convertible notes and stakes in some assets, but declined to comment further.

"The two companies are still in talks," Chinalco vice president Lu Youqing told Reuters on Monday.

He could not confirm a timeframe for a deal, which a Chinese newspaper reported was likely to be sealed before Thursday, when Rio Tinto releases its annual results.

CHINALCO KEY ISSUE

Leng did not mention the Chinalco deal in his statement, but an industry source said that was the key issue.

"He believes that the financial issue is not best resolved through this Chinese solution because it has some strategy implications that are going to restrict the long-term options available to the company," said the source, who declined to be named.

"This is a financial problem, it needs a financial resolution." Leng did not resign because he wanted to take up another chairmanship, the source added.

Analyst Charles Kernot at Evolution Securities in London said Leng's resignation made it more likely that Rio would agree a deal with Chinalco.

"If he was against the Chinese deal, then theoretically, they'll get consensus on the board and push it through," said Kernot, who favors a rights issue over a Chinalco deal.

"The difficulty is that if they're going to be selling off some of their growth assets, then not all of that growth will accrue to Rio shareholders."

Another deal potentially in the offing for Rio is a sale of an asset, possibly Rio's 75 percent stake in coal producer Coal & Allied Industries (CNA.AX), to Japanese trading group Mitsui & Co (8031.T), the Australian Financial Review reported.