Rio Tinto: Chinalco deal breakers include equity stake below 15%

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Chinalco’s bottom line towards its USD 19.5bn partnership deal with Rio is emerging, dealReporter reports, as it tries to both overcome Rio shareholder resistance and obtain Australian government approval, it is understood.

The proposed deal would see Chinalco take a stake in Rio’s major Australian assets and increase its direct stake in Rio to 19%. This includes establishing iron, aluminum and copper strategic alliance vehicles (SAVs), strategic alliance committees (SACs) and sales and marketing joint ventures, in which Chinalco would have equity and board representation.

As discussions between Chinalco and the Australian government enter an important phase, indications at this fluid stage are that Chinalco could be willing to dilute its proposed 19% Rio stake to as much as 15% to get the deal done. This could be done by extending the convertible bond offer to other Rio shareholders and perhaps changing terms to reflect market movements subsequent to the February proposal.

Chinalco, it is understood, is not currently contemplating partaking in any Rio rights issue – as speculated in the media - and would consider any such move a new transaction liable to trigger break fees.

In addition to the minimum 15% equity stake, Chinalco’s non-negotiable issues likely include the Hamersley iron-ore project, stakes in copper assets, and board representation, most likely two board seats but this could at a long shot yet end up at one, it is understood.

This far, negotiable areas include SAVs, SACs and joint ventures if they are not considered too far away from Chinalco’s fundamental objectives and do not seriously undermine Chinalco’s ability to protect its investment in Rio, it is further understood.

Indications are that Australian Treasurer Wayne Swan will take until his 15 June deadline to announce a decision.

Chinalco is understood to be relaxed and should the Rio deal fail (it puts the chances of success at 50% at best), it would have attractive alternatives to invest in the global resource space.

An official close to China’s NDRC said it is the Chinese government that wants the deal to be done more than Chinalco, explaining that from Chinalco’s perspective the deal is not necessary. He added that the Chinese government wants to hedge its foreign exchange reserve risks and also convert the reserves into resources assets. He agreed it likely that Chinalco would make some compromises to get the deal done.

Chinalco is nevertheless understood to believe that the silent majority of Rio shareholders are supportive of the deal but are being drowned out by opposing shareholders, the media and political opposition to the deal. In this light, Chinalco feels Rio’s board could be more aggressive in driving shareholders rather than conducting a road show to consult shareholders.

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