Chinese get 18% of Rio in $30b deal

This is the first of many, many deals.......as gold and power flow to the East.

THE chief executive of Rio Tinto, Tom Albanese, has deemed a $US19.5 billion ($30 billion) investment from Chinalco of China as the best solution to the miner's debt woes amid what he expects could be a two-year period of global economic uncertainty.

Rio unveiled the long-awaited deal yesterday after reporting record underlying earnings of $US10.3 billion - $US500 million better than expectations - and taking $US8.4 billion of write-downs, mostly related to the acquisition of Alcan in 2007 that led to its debt burden.

The deal with Chinalco, subject to approval by the Foreign Investment Review Board, will eventually hand control of 18 per cent of the miner to the Chinese state-backed enterprise.

It will also give Chinalco key stakes in some of Rio's most valuable assets, a marketing agreement in iron ore and allow it to appoint up to two directors to the miner's board.

Rio shares traded in London dropped 30 pence, or 1.5 per cent, to 1,939 pence at Thursday's close, paring a decline of as much as 18 per cent earlier, according to Bloomberg. The shares have lost 21 per cent since November 24, the day before BHP said it abandoned its offer.

Chinalco's president, Xiao Yaqing, last night said his company was willing to raise its stake in Rio from 9.3 to 18 per cent and to buy stakes in assets at a premium because it would bring "an attractive return over the longer term".

Mr Albanese said the deal would allow Rio to reactivate some alumina, coal and iron ore expansions in Western Australia and Queensland that could save 2000 jobs in Australia.

But he would not say whether the deal offered better value than BHP Billiton's failed takeover bid, which was never granted European competition approval and therefore not put to Rio shareholders.

"This [Chinalco] transaction would have been attractive before the downturn," he said.

"It is doubly so today."

During a conference call, some members of Rio's Australian management team expressed concerns about the transaction. Mr Albanese attempted to allay concerns that Rio was in effect handing control of a significant portion of the company and its prospects to the Chinese Government .

"In no way does this mitigate our ability to maximise our [iron ore] sales price or to avoid the full price tension we normally have in annual pricing negotiations," he told employees.

Chinalco will take stakes of 15 per cent to 50 per cent in various aluminium, copper and iron ore operations in Australia, South America and the US in return for $US12.3 billion.

Mr Albanese said Chinalco would not have pre-emptive rights over the remaining stakes in any asset except the Yarwun alumina refinery in Queensland.

BHP has a pre-emptive right over Rio's 30 per cent stake in the Escondida copper mine in Chile. Rio is selling 15 per cent of Escondida to Chinalco for $US3.4 billion, even though most analysts think the entire 30 per cent stake is worth a maximum of $US6 billion. It is thought BHP tabled an offer for the Escondida stake lower than the Chinalco valuation.

The only asset more valuable than the Escondida stake is the $US5.15 billion valuation of 15 per cent of Hamersley Iron, which is more in line with market expectations.

The head of White Funds Management, Angus Gluskie, said Rio was selling off not only part of its present asset base, but its future growth.

"It is going to be the effective sale in particular of some of the copper and iron ore assets which are going to receive the greatest scrutiny. They offer a good potential growth profile."

The Chinalco deal will require the approval of Rio shareholders at a meeting likely to be held in May, separate to its annual meetings in Australia and London in April.

Rio will need approval from a majority of investors in the dual-listed company, which means that a no vote in Australia alone is not enough to block the deal.

Chinalco is also taking $US7.2 billion in convertible bonds in Rio. The bonds, issued in tranches at an exercise price of $US45 and $US60 a share, would give Chinalco control of 14.9 per cent of Rio's Australian arm and 19 per cent of its British arm in return for annual interest payments of 9 per cent to 9.5 per cent and are redeemable by Rio after seven years.