Chinalco Seen Taking Up Rio Issue, Rights in Demand

China's state-owned Chinalco is taking up its full entitlement to miner Rio Tinto's $15.2 billion share issue, media reports said on Tuesday, with trade in the rights suggesting Chinalco is far from cutting ties with Rio.

London-listed rights to Rio Tinto's share issue surged 11.6 percent on Monday, chiming with British news reports that Chinalco had decided to take up its entitlement instead of looking to sell some of its rights in the market.

Britain's Financial Times and the Telegraph both reported that Chinalco was set to take up all its rights, which require it spending another 880 million pounds ($1.46 billion) to keep its stake in Rio Tinto's London-listed stock at about 12 percent.

Chinalco's relations with Rio Tinto soured in early June when indebted Rio called off a much bigger equity partnership that would have seen the Chinese group invest another $19.5 billion into the dual-listed Anglo-American miner.

Instead, Rio Tinto ditched the proposed deal in favor of the rights issue and an iron ore joint venture with fellow miner BHP Billiton , raising howls of protest from China where state media characterised Rio as a "dishonourable woman".

Chinalco's 12 percent of Rio Tinto's London shares give it about 9 percent of the overall group. It bought the stake in February last year, near the peak of the market, at 60 pounds ($99.69) per share in a raid on the London-listed stock.

The rights, which have traded ahead of the rights issue closing on Wednesday, jumped to 742 pence in London trade on Monday from Friday's close 665 pence as 9.97 million traded.

More From CNBC.com

• China Iron Ore Talks Deadline May Not See Deal
• China Fuel Prices at Highest Ever After Sudden Rise
• The 10 Hottest Commodities of 2009
• More Asia Pacific News

"If there was ever any expectation of an overhang in the rights, that seems to have been removed," a Sydney-based resources analyst said on Monday. He did not want to be identified because he was not authorised to talk to the media. 

Rio Tinto and Chinalco would not comment on whether the Chinese firm would take up the issue.

Citigroup resources analyst Clarke Wilkins, in a research note, said his firm expected Chinalco to take up its rights but there was no guarantee the firm would maintain its investment in the longer term, potentially creating an overhang in the stock.

Rio Tinto closed up 4.5 percent at 20.87 pounds on Monday. In Australia, the stock was up 3.5 percent at A$52.04 in the Asian session.

Rio Tinto is offering existing shareholders the right to buy 21 new shares for every 40 at 14 pounds each for the group's London shares and A$28.29 for the Australian shares.

Trading in Rio's Australia rights finished last Wednesday at A$21.10 (US$17.10) per right.

By taking up its rights, Chinalco would be able to lower the average cost of its holding.

Some analysts even suggested Chinalco might have bought extra rights on-market as the issue offered a discounted opportunity to lift its stake to a maximum 14.9 percent permitted to under Australia's foreign investment rules.

The new shares will account for 34 percent of the total shares on issue and will be about 31 percent dilutive over the medium term after accounting for the benefits of the funds raised, according to Austock Securities.

Copyright 2009 Reuters. Click for restrictions.