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Chinalco Says No Plans for Bigger Rio Stake

Reuters
Monday, 4 Feb 2008 | 1:24 PM ET

Aluminum Corp of China (Chinalco) said on Monday it was content with the $14 billion stake it bought last week in miner Rio Tinto, dousing talk it was planning a rival bid to BHP Billiton's offer for Rio.

Rio Tinto
Rio Tinto

Chinalco President Xiao Yaqing told reporters in Sydney the purchase was a strategic investment and the Chinese company had no plans to interfere in Rio's management.

Chinalco's purchase, with the help of Alcoa, came days ahead of a UK regulator's deadline on Wednesday for BHP to pitch a formal offer for Rio.

Rio has rejected BHP's initial offer of three of its shares for every Rio share, worth $123 billion at current prices, down from $139 billion when first pitched in November.

"We are satisfied with our 12 percent stake," Xiao said, speaking through an interpreter, adding that the timing of the share purchase was based on Rio's London share price.

Chinalco and Alcoa bought a 12 percent stake in Rio's London-listed shares, giving them a holding of over 9 percent in the whole firm, also listed in Australia.

Xiao insisted the deal was more about extending state-controlled Chinalco's reach into diversified markets, such as iron ore and copper, where Rio is strong.

Chinalco paid 60 pounds a share, a 21 percent premium to Rio's London share price on Thursday. It said in a statement at the time it had no immediate plans to make an offer for all of Rio, though it reserved the right to do so if another party tabled a firm bid.

Rio's shares in London dipped 1.3 percent as fund managers took profits in Rio and switched to Anglo American, which gained 1.2 percent, John Meyer at Fairfax in London said. BHP's stock added 1.7 percent on the FTSE-100.

"It makes it more complicated for BHP, but it doesn't mean there's another bidder there. It really looks like these guys just want a seat at the table, maybe some assets," said Steve
Robinson, a portfolio manager with Alleron Asset Management.

Flex Muscle

The move by Chinalco, one of China's big state-owned companies, comes as Beijing shows signs it may be ready to flex more of its financial muscle overseas after being pumped up by
years of economic growth at home.

Takeover Bid for Rio Tinto
Chinalco and Alcoa's stake purchase in Rio Tinto isn't sufficient to derail a takeover from BHP Billiton. Hugh Dive, senior equities analyst at Investors Mutual Limited analyzes the situation with CNBC's Amanda Drury, Martin Soong and Sri Jegarajah.

China's move to secure the Rio stake seems to be part of a wider plan to cool a merger frenzy in the mining sector and head off the creation of mega mining groups, another analyst said.

"China has a strong interest in preserving a diversified and competitive mining industry," Sempra analyst John Kemp said.

"Senior leaders are clearly worried about the industry's rapid consolidation, and the risk it will tilt the balance of market power even further in the direction of a handful of
mining majors."

The China Development Bank, which financed Chinalco's purchase of the Rio stake, has also held talks to buy a 35 percent stake in Anglo-Swiss mining group Xstrata, a newspaper
report said (see).

Xiao added that Chinalco planned more investments in Australia's resource sector, where it has already earmarked around $3 billion for bauxite mining and aluminium smelting in
the Aurukun aboriginal region.

China Investment Corp, a sovereign wealth fund holding around $200 billion and China Shenhua Group, a coal miner, were in talks to buy a 15.85 percent stake in Australia's Fortescue
Metals Group Ltd for about $2 billion, according to the South China Morning Post. See.

Rio's own acquisition of Canada's Alcan in November would mean a combined BHP-Rio would have a stranglehold on much of the world's supply of the aluminium-making ingredient alumina.

That could threaten other aluminium makers such as Chinalco and Alcoa, which may help explain the motive for buying up Rio stock, ABN AMRO said in a report.

"The reason Chinalco and Alcoa have teamed up to try and block the BHP offer for Rio is to prevent a structural change in the pricing of alumina," it said.

Rio Chief Executive Tom Albanese has repeatedly labelled BHP's offer as "two ballparks away" from true value. The deal is potentially the second-biggest takeover in history.

Marius Kloppers, BHP's chief executive, has argued the price is right and that the real value of a marriage would come via billions of dollars worth of savings from synergies in
everything from iron ore and diamond mining to copper smelting.

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