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Chinalco has authorised a special team to watch for an opportunity to increase its stake in Anglo-Australian iron ore giant Rio Tinto to the permitted 14.99%, Youqing Lu, the vice president of Chinalco, told dealReporter. However, a stake increase would not be an immediate move as Chinalco needs to strengthen itself both in finance and management first, agreed Lu and other three sources close to Chinalco.
Since BHP Billiton withdrew its bid for Rio Tinto, the Chinese state-owned metal giant is no longer under pressure to fend off BHP any more. However, Chinalco’s interests in Rio is long term and strategic, the first source close to Chinalco said, adding that Chinalco would go on to expand its controlling power in Rio during the downturn of the global commodity market.
Despite the painful adjustment of the global iron ore market, Chinalco still sees great potential in Rio and will pursue greater control, said Lu and the first source. Lu believed that China’s demands for iron ore resources would last for a long time because China still needs to develop its vast western region.
Lu admitted that right now, low commodity prices have provided a good opportunity for Chinalco to increase its stake at a relatively low cost. However, in response to the question whether Chinalco would act to increase the stake immediately, Lu declined to comment. He is currently focused more on strengthening Chinalco’s management team and industrial integration. Chinalco has bought many assets in recent years and has developed very fast, Lu said. It now needs to pay attention to digesting these assets, better integrating and consolidating them, and making itself stronger, he said.
Chinalco would probably not have adequate financial resources to increase its stake in Rio immediately, the first source and the second source close to Chinalco said. Chinalco is pursuing a government capital injection of CNY 60bn (USD 8.77bn), the first source revealed. He declined to reveal when the capital injection would be made and whether the stake increase would follow the capital injection.
So far no decision regarding the stake increase has been made by Chinalco, said a third source close to Chinalco. He said there had been a fundamental change in circumstances with the BHP deal being dropped but also said he did not think current low prices would be the main driver in a decision. “It’s more a question of fundamental analysis than of technical price factors,” he argued.
According to a Chinese government advisor, the central government has encouraged large Chinese companies to go outside and buy resources companies while the commodity market is low. “It is the best outbound acquisition timing for Chinese resources buyers from now on till next year,” he said, adding that he was unsure whether Chinese companies had realised this.
“We have a special team monitoring Rio Tinto’s performance and market movements in real time and will evaluate the best timing to do the stake increase,” Lu said. He further clarified that Chinalco does not need to ask for domestic regulatory approval again for the stake increase. “Chinalco can make the purchase decision by itself at any suitable time,” he said.
Asked whether Chinalco would buy Rio Tinto shares in Australia or still in London, he said Rio Tinto share prices were almost same in the two markets, in contrast to Chalco shares which are priced differently in Hong Kong and in Shanghai. Chalco is the major listed subsidiary of Chinalco. With Rio it doesn’t make much difference whether they buy in London or in Australia, Lu said.
Chinalco announced its stake in early February after an on-market dawn raid led by Lehman Brothers.
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