Chinalco Gets Australia's Approval to Raise Rio Stake

By Rebecca Keenan

Aug. 24 (Bloomberg) -- Aluminum Corp. of China, or Chinalco, got Australian approval to raise to 11 percent its stake in Rio Tinto Group, the target of a hostile $143 billion takeover by rival miner BHP Billiton Ltd.

``I have decided to raise no objections under Australia's foreign investment policy,'' Wayne Swan, Federal Treasurer of Australia, said today in a statement. Chinalco, in partnership with Alcoa Inc., bought a 9 percent stake in London-based Rio in February and said in March it may seek to increase that holding.

The bid by China's biggest aluminum producer may make it more difficult for Melbourne-based BHP to succeed in its all- stock takeover offer for Rio, the world's third-largest mining company. Chinalco may be seeking to increase its stake to block that deal, the Australian Financial Review reported Aug. 12.

``This will underpin the Rio share price and also create uncertainty about whether or not BHP will get its deal over the line,'' Stephen Bartrop, a resources analyst and director of Sydney-based Stock Resource, said by phone today. ``Even if Chinalco doesn't increase its stake, it shows they have the capacity to block the deal.''

BHP closed 3.1 percent higher at A$40.15 on Aug. 22 on the Australian stock exchange and Rio gained 0.7 percent to 5,179 pence on the London Stock Exchange. Rio's stock is 14 percent below the 6,000 pence a share price paid by Chinalco and Alcoa when they bought their stake.

Liu Qiang, Chinalco's company secretary, couldn't be reached on her mobile phone for comment. Rio spokeswoman Amanda Buckley also couldn't be contacted.

`Australia Welcomes'

``While Australia welcomes foreign investment in our economy, we will carefully examine national interest issues where these arise in relation to foreign sovereign ownership,'' Swan said in the statement. Chinalco will have to reapply to increase its stake beyond the level approved today, and has agreed not to seek representation on Rio's board, Swan said.

BHP Chief Executive Officer Marius Kloppers wants the Chinese company's support for his deal, which would create the world's biggest producer of aluminum and energy coal. Chinalco was a guest of BHP at the Olympic Games in Beijing this month, and Kloppers said on Aug. 18 he can't comment on individual shareholder discussions.

Swan's approval today enables Chinalco to hold as much as 14.99 percent of Rio's London shares, equivalent to 11 percent of the mining company's combined Australian and London equities. Chinalco was in talks with Alcoa Inc. to consider raising their holdings, Chairman Xiao Yaqing said March 18.

Resources Strategy

Chinalco said in February it bought the stake to diversify into other metals and as part of a strategy to secure resources. It may want to secure any alumina or aluminum assets that may be sold off if BHP buys Rio, Stock Resources' Bartrop said.

``It could do a soft deal with BHP and vote for the merger in return for securing the assets,'' he said.

Chinese companies are making more acquisitions to help feed an economy that's grown at more than 10 percent a year since 2001. Chinalco bought Peru Copper Inc. for $860 million in August last year.

Chinalco and Alcoa bought the stake in Rio in a surprise raid just five days before BHP increased its takeover offer for Rio in February. Rio rejected that offer as two low.

China's steelmakers have said a combination of BHP and Rio would exert too much power in the iron-ore market, and other analysts have speculated Alcoa still is interested in the aluminum assets Rio acquired when it took over Canada's Alcan Inc. in July, topping Alcoa's hostile offer.

Alcoa can force Chinalco to buy it out of the joint investment, New York-based Alcoa said April 25. Under the companies' Shining Prospect Pte venture, Alcoa can compel Chinalco to purchase its portion of the stake at market rates after a six-month period expires. Alcoa contributed $1.2 billion to the $14 billion investment.

-- With reporting by Chua Kong Ho in Shanghai. Editor: Mike Millard, Jim McDonald

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net