What's Behind Alcoa and Chinalco's Latest Stake in Rio Tinto?

Alcoa Inc.’s (AA) contribution of $1.2-billion to the $14-billion that it and Aluminum Corp. of China (ACH) paid for a 12% stake in Rio Tinto Plc (RTP) last week is relatively minor, according to BMO Capital Markets’ Tony Robson. In a note to clients on Friday, the analyst also noted that his firm “doubts the Australian government would approve Chinese involvement at this scale in the Australian mining industry.”

He also raised the possibility of Chinalco and Alcoa forcing a break-up of the dual-listed Rio, with them getting the former Alcan held through Rio Tinto Plc, while BHP Billiton Ltd. (BHP) would get Rio Tinto Ltd.’s iron ore.

It is more likely that the Chinese government is trying to block the BHP-Rio merger in an attempt to keep long-term iron ore prices down, Mr. Robson noted, adding that this move may be enough to do so.

Many viewed the move as an attempt to derail BHP Billiton Ltd.’s hostile bid for one of the world’s largest mining companies. However, Chinalco and Alcoa have no intention to bid for Rio, according to RBC Capital Markets analyst Fraser Phillips, but they do reserve the right to.

He also sees the move as attempt by Alcoa to acquire Rio’s aluminum assets.

While noting that Alcoa’s capital commitment may limit its near-term share buybacks, the analyst also suggested that the company could benefit from rising aluminum prices that may result from power shortages and production cuts.

“This may present a trading opportunity and investors with a shorter time horizon may wish to buy the shares,” Mr. Phillips told clients in a note, adding that economic uncertainty and the outcome of the Rio takeover continues to support a “sector perform” rating and $38 price target for Alcoa shares.