Tags: Jason Simpkins

Chinalco, Alcoa Stun BHP With Surprise Counterpunch, Grabbing a 12% Stake in Takeover Target Rio Tinto

By , Money Morning •

By Jason Simpkins
Associate Editor

Playing the role of the white knight, Aluminum Corp. of China (ACH) and Alcoa Inc. (AA) on Friday teamed up and took a $14 billion stake in Anglo-Australian miner Rio Tinto Group PLC (RTP), hoping the move will derail BHP Billiton Ltd.’s (BHP) plan to buy Rio and create a globally dominant metals company.

The surprise bid by Aluminum Corp. of China, also known as Chinalco, and Alcoa, is the largest-ever outbound investment by a China-based company.

Chinalco and Alcoa together now control 12% of the Anglo-Aussie mining company, which translates into a 9% ownership stake in the larger Rio Tinto Group. Sources close to the deal said the deal is clearly a strategic challenge to BHP, which just months ago attempted an unsolicited takeover of Rio. That contention rings true, especially after Chinalco, China's largest aluminum producer, and Alcoa, the world’s No. 3 maker of the metal, said they don't plan to bid for the rest of Rio Tinto.

“It’s clearly a spoiling move,” Tim Barker, of the BT Financial Group, told Bloomberg News. “Where you have a blocking stake like that it would be difficult to win some aggrieved shareholders unless they thought they were getting the right deal.”

BHP, the world’s largest mining corporation, late last year proposed a $130 billion takeover to Rio Tinto.  But Rio rejected the offer, contending the financial package dramatically undervalued the target company and its prospects.

Rio achieved record levels of production for iron ore, alumina, aluminum, bauxite, gold and copper in 2007. The company said it produced 145 million tons of iron ore last year, a 9% increase over 2006.

Chinalco President Xiao Yaqing wants to stop BHP from creating a company that would supply a third of the world's traded iron ore and be the biggest maker of aluminum and energy coal. If mining giants BHP and Rio Tinto were to combine forces, the resultant company would control virtually the entire iron-ore industry in Australia, China’s biggest supplier. It would hold sway over approximately 38% of the seaborne iron ore trade.

And it would be a heavyweight in the world metals market.

China needs raw materials to fuel an economy that advanced at an 11.4% annual clip in 2007, the fastest rate in 13 years.

Chinalco wants “to be involved in the discussions over the future of these companies and the Chinese want to have leverage over these strategic natural resource assets,'' James Withall, a fund manager at London-based Baker Steel Capital LLP, told Bloomberg News.

Alcoa Chief Executive Officer Alain Belda helped establish Chinalco's listed unit by buying a stake in 2001.

Shortly after BHP’s original bid, Rio approached the U.K. Takeover Panel and asked the regulatory agency to set a deadline for BHP to "put up or shut up." A deadline was set for Wednesday, Feb. 6.  If BHP fails to make another offer by then, it must wait six months before it’s eligible to make another.

It was widely rumored that BHP had another offer in the works. Australia’s Herald Sun reported on speculation that BHP was preparing to sweeten its proposed deal by upping its offer to $151 per share. The previous offer valued shares of Rio at $138 a piece, a 20% premium to their worth at the time.

But now, if BHP wants to buy Rio, it will have to negotiate with Chinalco. And with just three days left, the clock is ticking.

“It might stall or slow the whole BHP offer,” Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd., told Bloomberg. “It might make them think twice as now there’s a major shareholder that would be looking to extract full value.”

Riding the Iron Horse

Iron has been integral in the construction of China’s skyscrapers, towers, bridges, railroads and ports.

The nation’s soaring demand for the raw material is part of the reason Macquarie Group Ltd. believes iron ore will soar 50% in price next year. 

Investment bank UBS AG (UBS) has also said that global steel companies will end up paying 55% more in 2008 than 2007.

“We believe that the dynamics of the iron ore market remain firmly in favor of the mining companies. Spot prices for iron ore continue to trade roughly 200% higher than the 2007 contract level. We have raised our price increase assumption for the upcoming 2008 contract to 55% from 35%,” the company said in a research note.

With escalating commodity prices and growing demand, China’s steelmakers can’t risk losing any leverage in negotiations. And a BHP-Rio Tinto conglomerate would control almost half the Asian market for iron ore.

Last November, during an interview with Bloomberg News, Aluminum Corp. of China President Luo Jianchuan said, “Someone told me that if they combine copper ore and iron ore, prices may double next year… It makes us worried."

Clearly Luo and Chinalco were worried, but their surprise counterpunch has put BHP on the defensive with very little time left to do anything about it.

The newly acquired stake is officially held by Shining Prospect, a Singapore-based investment vehicle, wholly owned by Chinalco. Alcoa contributed $1.2 billion to the purchase. 

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