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.
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.
“We’re also very pleased to have access to some tier one, world class assets as well as the expertise of a world class management team,” Xiao said.
Chinalco said it had agreed to buy out the interest of its partner, U.S. aluminum group Alcoa, in the original 9 percent stake in Rio the two bought in February 2008 for $14 billion. Chinalco said it would pay $1.02 billion to Alcoa, close to Alcoa’s original $1.2 billion investment.
Rio’s deal with Chinalco could come up against counterbids by BHP for some of the assets Chinalco is set to pick up, analysts said.
Rio said it was open to higher offers from third parties, but would not solicit any competing offers.
Rio plans to use the money to make early payments on $8.9 billion in debt due in October and $10 billion due late next year.
The cost of insuring its debt fell on word of the Chinese investment, with Rio’s credit default swaps at one point falling 100 basis points to 525 bps, or $525,000 a year for five years to insure $10 million in debt.
The bailout by Chinalco represents a backdown for Rio CEO Tom Albanese and the board, which last year fiercely opposed a takeover offer from BHP which was worth more than twice as much as Rio’s shares now fetch.
Rio Tinto’s chairman-elect, Jim Leng, quit the board this week in protest over the pending deal with Chinalco. Albanese said Leng was in a minority of one.
“It’s clear that of all the options we considered ... this deal offers far, far superior value to shareholders,” Albanese told reporters, adding Rio had been in talks with Chinalco since mid 2008.
UBS analyst Glyn Lawcock in Sydney said the asset sales were priced at about a 14 percent premium to his valuation.
“At the end of the day, they’ve removed the debt issue for the next couple of years, which is a positive. It enables them to move ahead with expansions again now, should the market require them,” he said.
Rio, the world’s third-biggest diversified mining group by market value, announced the tie-up along with a 38 percent increase in full-year underlying earnings to $10.3 billion, ahead of market forecasts, but wrote down its aluminum business by $7.9 billion.
Morgan Stanley and Credit Suisse advised Rio Tinto; JP Morgan, Nomura, Blackstone and CICC advised Chinalco.
Additional reporting by James Grubel, Bruce Hextall, Mark Bendeich and Cecile Lefort in Australia, Joseph Chaney and Michael Flaherty in Hong Kong, Nick Trevethan in Singapore and Eric Onstad in London, Editing by David Cowell and Andrew Macdonald