China teamed up with U.S. aluminum producer Alcoa to buy a $14 billion stake in Rio Tinto on Friday and said it may make a bid, threatening miner BHP Billiton's efforts to win Rio.
The move by state-owned Aluminum Corp of China (Chinalco) is the country's biggest ever investment overseas and comes days before a regulatory deadline on Wednesday for BHP to make a firm offer for Rio or to walk away.
Chinalco said it had bought a 12 percent stake in Rio's London-listed shares, giving it a total holding in the group of around 9 percent, including Rio's Australian listed shares.
Rio, the world's No.2 miner by market value, has rejected a 3-for-1 all share offer from No.1 BHP, worth $127 billion at current prices. Analysts have long tipped China to seek an influence as both companies' biggest customer.
"It has all the appearance of a blocking stake," said Graham Birch, a fund manager at BlackRock, which is a major shareholder in both Rio and BHP. "It's timed to be a bit of spitting in BHP's soup."
Investment bank Lehman Brothers said it bought the stake in Rio for Chinalco and Alcoa at 60 pounds a share, 21 percent above Rio's closing price of 49.56 pounds on Thursday.
Chinalco and Alcoa said they did not currently intend to make an offer for the whole of Rio, but reserved the right to do so if another party made a firm bid.
Rio shares leapt 13 percent, while shares in Chinalco's unit, Aluminum Corp of China (Chalco), jumped by more than 15 percent. BHP shares also surged 9.8 percent.
BHP's offer for Rio, now worth about 50 pounds a share, would be the world's second-biggest takeover and create a $318 billion company with a massive controlling force across a range of commodities such as copper, aluminum, iron ore and coal.
The proposal, announced on Nov. 8, has sparked a frenzy of bid activity in the mining industry, as companies jostle for scarce resources and to get a bigger slice of booming commodities markets. Brazil's Vale said last month it was in talks to buy Anglo-Swiss group Xstrata in a deal which analysts have said could approach $100 billion.
Analysts were divided whether Chinalco and Alcoa's move would block deter BHP or spur it into making a higher offer.
"The door is still very much open for BHP. 12 percent is not a blocking stake... and 60 pounds a share is equivalent to about 4-to-1 (BHP shares per Rio share) and we think BHP can go up to about 4.5-to-1," said Liberum Capital's Michael Rawlinson.
But Julian Chillingworth, Chief Investment Officer at Rathbone Investment Management, which owns Rio shares, said the stake made life much harder for BHP.
"BHP would have to raise the bid quite aggressively and I don't see these two new shareholders as sellers in the short-term because they obviously bought the stake to make sure they've got independent supply," he told Reuters.
John Meyer, head of resources at Fairfax, agreed. "If BHP wants this deal to go through, I think they have to offer some cash. I simply don't think cash is available to them."
BHP declined to comment.
"Our acquisition of a significant strategic stake in Rio Tinto today reflects our confidence in the long term prospects for the rapidly evolving global mining sector," Chinalco's President Xiao Yaqing said in a statement.
Rio said the stake purchase reinforced its position that the current proposal from BHP undervalued it.
Chinalco and Alcoa bought the stake in Rio through Shining Prospect Pte, a Singapore based entity wholly owned by Chinalco and into which Alcoa has committed $1.2 billion.
The two companies have a long history together. In September 2007, Alcoa sold its stake in Chinalco's Chalco unit for $2 billion -- a $1.8 billion profit on an investment it held since Chalco's 2001 initial public offering.
A source familiar with the situation said China Development Bank, a policy lender that has backed some of the country's biggest overseas acquisitions, led the funding of the purchase.
British Prime Minister Gordon Brown's spokesman said when asked about the Chinalco deal, "I don't really want to comment on matters relating to individual companies. I think our general position on inward investments is well known."
Britain has a liberal policy on foreign investment and allowing overseas firms to buy British companies.
BHP is being advised by Goldman Sachs, Gresham in Australia, Citigroup, HSBC and UBS, while Morgan Stanley, Rothschild, Macquarie in Australia, Credit Suisse, JP Morgan Cazenove and Deutsche Bank are acting for Rio. Lehman and China International Capital are advising Shining Prospects.