Deals and IPOs

Chinalco More Likely to Raise Rio Stake


Chinalco, the Chinese metals company that led a stunning $14 billion investment in Rio Tinto could raise its stake in the global mining firm and has no intention of cutting back on its ambitions elsewhere.

Rio Tinto

"We have set the target of building up a first-class global enterprise, a brand that stands for 100 years," Chinalco's president Xiao Yaqing told a group interview in Shanghai. "And we've realized the brand will only stand for 100 years if we own mining assets, and not just smelting facilities."

Chinalco burst onto the world stage six weeks ago with the Rio purchase it made jointly with Alcoa, gatecrashing a takeover plan by Rio's rival BHP Billiton at the last moment before BHP unveiled its own, lower bid.

The purchase of 12 percent of Rio's London-listed shares for $14 billion, or almost 60 pounds a share, was widely seen as a deliberate move to stymie BHP's bid.

"I feel the price was very good. It was a very appropriate price. The price was not high considering Rio's value," Xiao said. "In the current circumstances, the possibility of raising the stake is higher than cutting it."

Rio's shares opened 3 percent higher after he spoke and were trading at 52.23 by 9:26 a.m. London time.


Xiao said Chinalco would decide whether to increase its stake in Rio based on two criteria: Chinalco's judgment of Rio's share price and the opinion of its partner, Alcoa .

"We bought at 60 pounds a share and if they rise to 100, we could consider selling some," he joked, laughing heartily.

A 100 pound share price would put Rio just outside the 10 most valuable companies in the world.

Turning serious, Xiao stressed that the decision would be a joint one and, although Chinalco was talking to Alcoa, no move was imminent.

"Alcoa and Chinalco have not made a plan for the next move yet," he said.

He declined to be say how many shares the two firms might buy if they raised their stake and said details were subject to commercial confidentiality.

He also declined to give details of their partnership, but a company source said Chinalco had 9 percent of Rio while Alcoa had 3 percent.

Alcoa's history with Chinalco began when the U.S. firm supported the 2001 floatation of its subsidiary Chalco, taking a stake of around 8 percent. Alcoa cashed out last September with a gain of almost $2 billion, prompting many analysts to wonder if it had played a good hand badly.

But the Rio investment revived the old friendship.

"I think the kind of cooperation we have with Alcoa is a better model for Chinese companies going overseas than trying to go it alone," said Xiao. "We are always open to working with international companies, including funds and investment banks, even if we are the minority partner and they have the larger stake."

Further Afield

Chinalco plans to make copper production its second largest base metal interest after aluminium. With copper smelting would come by-products, gold and silver, Xiao said. It already has a copper project in Peru and controls China's Yunnan Copper Industry (Group), but it is looking for more.

"We're targeting areas where there are concentrations of resources, such as Indonesia, Africa and some parts of South America," he said.

Chinalco was looking at five or six foreign projects, he said.

Despite upsets in the U.S. economy and global stock markets, Chinalco's appetite for expansion was undimmed because China itself is still firing on all cylinders, Xiao said.

"I do not think China's economic growth will slow down to 8 percent this year. In my opinion, it is very hard to drive China's economic growth to down under 10 percent annually."

As well as copper, Chinalco wants greater exposure to minor metals such as titanium and magnesium, Xiao said.

He said magnesium production needed a technological breakthrough, since it currently consumed too much energy, which was against China's goal of cutting energy use and emissions.

Chinalco has already teamed up with a foreign partner in titanium, which Xiao said would be in increasing demand from everyone from aircraft manufacturers to golf club makers.

It and Russia's Aricom are jointly building a titanium sponge plant in Jiamusi in northern China, which Xiao said was expected to double capacity to 30,000 tonnes in coming years.