Chinalco's Investment in Rio Tinto: A Great Leap Forward

Chinalco, the Chinese state-owned metals and mining conglomerate, has made a decisive leap forward by agreeing to invest $ 19.5 bn in troubled mining giant Rio Tinto (RTP). This move comes one year after Chinalco successfully acquired - jointly with the Alcoa (AA) group - a 12% stake in the UK listed arm of the Rio Tinto group, equivalent to a 9% stake in the group itself.

According to the Financial Times, "the deal, which will involve the sale of minority stakes in some of Rio's best mining assets and the issue of convertible bonds, marks the biggest ever investment by China in a foreign company. Chinalco will buy $7.2bn in convertible bonds which will convert into Rio shares at a later date. That would increase its stake in Rio from 9 per cent to 18 per cent. The rest of the capital injection comes from the sale of the minority stakes."

As a matter of fact, Chinalco is pursuing an agressive growth strategy abroad, by taking advantage of the current slump in commodities prices, to buy strategic assets at a distressed price. This is consistent with a rising trend among state-backed Chinese companies, not only in the resource sector but in other sectors as well, to consolidate their dominant position at home and to expand abroad, as I wrote in a previous post three months ago.

Indeed, as Yan Janging, from Caijing Magazine reported, according to some experts the current uncertain environment could be a good opportunity for Chinese companies to continue their expansion overseas. He quotes Ian Sperling-Tyler, oil & gas director in Deloitte, who said that China's state-owned oil companies may have an especially good chance to buy a dozen independent oil firms, the market values of which are all lower than their net assets.

Although, the Chinalco Rio deal can still be jeopardised by regulatory authorities in Chile and Australia, or by angry shareholders in the UK, it is an important symbol of the structural shift in global capitalism. A shift that signals distinct features from the pre-crisis world.

Comments

[yank:]

It's astonishing to me to see how badly Mr. Albanese (Rio's CEO) has bungled this entire process. Even today he continues to harp on about how the recent BHP deal was bad for RTP shareholders. How is that possible Tom? You had on offer on the table at the very peak in commodity prices which would have fetched an attractive premium to Rio's asset value. Instead now you have invited scrutiny by regulatory authorities, you have diluted the value of existing Rio shareholders, and you have sold offerings at what quite possible could be the "trough" of this commodity cycle. It's unbelievable to watch the contortions Albanese went through to avoid a BHP partnership. Especially since the combination of the two would have formed the largest, most profitable mining company in the world. Not to mention the considerable cost savings and synergies gained by consolidating two workforces that already work side-by-side in multiple mining locations throughout the world. If I were on the board of Rio I would call for the "sacking" of Albanese immediately. He has mishandled this affair from the very first offer made by BHP management.

Feb 12 12:22 PM

[Truefire:]

Looks like China has turned the page. The US was the last chapter.

Feb 13 07:46 AM