Rio Tinto cancels controversial Chinalco tie-up

Anglo-Australian mining giant Rio Tinto settled its tie-up with China's Chinalco with a $195 million break fee and an alliance with BHP Billiton. The move allowed the Australian government to skirt the controversial decision to approve the deal.


AFP - Mining giant Rio Tinto on Friday cancelled its controversial tie-up with China's Chinalco in favour of a joint venture with fierce rival BHP Billiton and a 15.2 billion US dollar rights issue.

Shares in the Anglo-Australian firm soared nearly 12 percent after the announcement, which spared Australian Prime Minister Kevin Rudd from making a politically risky decision on whether to approve the Chinalco deal.

Rio chairman Jan du Plessis said commodities prices had recovered since Chinalco made its bid to invest 19.5 billion US dollars in Rio, making that deal less attractive.

"Since we announced the Chinalco transaction in early February, financial markets have seen a significant improvement," he said in a statement.

"This has had two consequences -- firstly, the financial terms of the Chinalco transaction become markedly less valuable, and secondly our ability to raise a level of equity appropriate for our needs on attractive terms has improved very considerably."

The government had been due to rule on the deal this month, but Treasurer Wayne Swan denied the protracted approval process for the deal that sparked heavy opposition in Australia had put the Chinalco bid at risk.

"I completely reject that," Swan told reporters, adding it was purely "a commercial matter between the partners."

"Australia welcomes foreign investment. It is very important for this country and we welcome proposals from foreign countries provided they are in the national interest," he said.

Rio has been searching for extra funds after its purchase last year of Canadian aluminium group Alcan, which saddled the company with some 38 billion dollars of debt.

But Chinalco's emergence as a suitor sparked a political firestorm here over ownership of Australian assets, leaving the government with a difficult choice -- to risk angering either its electorate or China, a key market.

"We are very disappointed at this outcome," Chinalco president Xiong Weiping said in a statement on the company's website.

Rio said it would pay Chinalco a break fee of 195 million US dollars to pull out of the deal, which had been set to be a record investment by a state-owned Chinese firm.

The dual-listed Rio will now issue 21-for-40 deals in London and Sydney at 1,400 pence and 28.29 Australian dollars respectively, its statement said.

The company also unveiled an iron ore joint venture with rival BHP Billiton, the world's biggest miner, under which the two companies will share equally their vast assets in Western Australia.

BHP, which abandoned a hostile takeover bid for Rio in November, will hand over 5.8 billion US dollars to Rio as part of the deal, which is expected to yield 10 billion US dollars in savings.

"The synergies in this combination are so substantial that both companies have been investigating ways to combine these operations for more than a decade," said BHP head Marius Kloppers.

Rio chief executive Tom Albanese said the deal, which requires shareholder approval, was a "natural fit."

Rio shares surged 11.9 percent to 74.86 Australian dollars soon after the announcement, while BHP Billiton was up nine percent to 38.27.

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