Will Chinalco-Alcoa Stake Thwart BHP from Rio Tinto?

On Friday, Chinalco (NYSE:ACH), China’s largest aluminum company, and Alcoa (NYSE:AA) teamed up to buy a 12% stake in Rio Tinto Group, (NYSE:RTP) less than a week before BHP Billiton (NYSE:BHP) is expected to sweeten its offer for Rio.

It’s a dance reminiscent of the INCO, Xstrata (XSRAF.PK), CVRD (NYSE:RIO) dance that unfolded two years ago, and there may yet be a surprise suitor in this love triangle among mining titans.

The first question on everyone’s minds is whether or not the surprise move by Chinalco and Alcoa will in fact dissuade BHP from entangling itself more deeply in a fray that is likely to cause a lot of pain to the losers.

It is important to bear in mind that the 12% stake in Rio Tinto’s London listing only translates into a 9% stake in the whole group, short of the 10% necessary to completely block a takeover bid. It’s a very clever strategy for Alcoa and Chinalco.

You can safely bet that Brazil-based CVRD (now called “Vale”) and Switzerland’s Xstrata are fidgeting in their seats at the prospect of a market leader the size of a combined BHP/Rio Tinto. But most observers see the move by Chinalco/Alcoa as a tactic designed to obtain the aluminum business of Rio, which was significantly enhanced with its recent acquisition of Canada’s Alcan.

BHP has until Wednesday to either improve its offer or abandon the bid…for now. They will have to belly up more shares and hand over cash as well to seriously entice Rio’s shareholders, who will be disinclined to give much ground in view of Friday’s deal.

Chief equities economist for Commonwealth Securities, a division of Australia’s Commonwelath Bank, James Craig said BHP must consider the new share holders before deciding what to do next.

"Chinalco and Alcoa now have a seat at the table," he said. "BHP will need to come up with a bid that is closer to what Rio Tinto is wanting, and that would mean four or 4.25 BHP Billiton shares for every Rio Tinto share."

Rio said the stake purchase reinforced its position that the current proposal from BHP undervalued it.

"This unsolicited development, of which we had no prior notice, reinforces our view of the long-term value of Rio Tinto," Rio Tinto chairman Paul Skinner said. "In line with our long-standing strategy, we shall continue to focus on operating our many world-class assets to maximise value and prospects for all shareholders."

One way or another, BHP will have to come up with another decision by February 6.

Mr James said if BHP was serious about potential synergies, then it would have to pay more.

If BHP does go higher, to four or 4.25 (shares), then Chinalco has made a tidy investment in a short period of time, or potentially they will be able to secure some of Rio Tinto's aluminum assets, so it's a very smart strategic bid.

BHP may also involve one of the other global miners if it determines that the loss of the aluminum component of Rio to Chinalco and Alcoa is too great a competitive risk.

In Britain, it is rumored that privately-held Glencore International AG, the Swiss-based owner of a 35% stake in Xstrata, has been approached by Vale for that stake. A combined bid for Rio may then be forthcoming from the result of that deal, should it proceed swiftly enough.

Its all enough to make one’s head spin, and is becoming as exciting as the Super Bowl. We are witnessing nothing less than a corporate fight for the known reserves of the world’s raw materials.