Rio boosted by talk of Chinalco changes

22nd May 2009 08:33

Shares in Rio Tinto rallied on persistent talk that its deal with Chinese aluminium firm Chinalco is about to be redrawn.Reports in the Australian press overnight suggest major shareholders still remain very unhappy over the deal, especially as commodity prices have recovered strongly in recent months.Authorities in Australia are also said to be concerned over the power over pricing the deal could give Chinalco, which is state-owned.The Sydney Morning Herald reported that Chinalco might waive its right to 30% of Rio's iron ore output and make a firm commitment not to get involved in pricing discussions.However, the reports added that the Chinese firm is not prepared to change its position on its stakes in other Rio assets or its requirement for two people on Rio's board, though there might be a possibility of reducing its potential stake in Rio from 18% to 15%.Rio has been embroiled in rows ever since it signed the deal with Chinalco in February. Chinalco agreed to pay $12.3bn for stakes in a number of Rio's mining assets and to subscribe for a $7.2bn convertible bond that could double its equity stake from 9% currently to 18%.Since then, Rio's share price has almost doubled as commodity prices have recovered and equity markets have stabilised, raising questions over whether Rio could get better value through a straightforward cash call.Rio originally said it could not raise enough cash from a share issue to cover the obligations on its $39bn of debt, but the recent share price rally has made that option much less clear cut. Its UK investors have been consistent and vocal critics of the deal for diluting their holdings and not giving them a chance to come up with the cash Rio needs. Opposition has also been mounting in Australia on concerns that China could have undue influence on the pricing of key commodities if it goes through.There has even been talk recently that BHP Billiton might resurrect its takeover plans after abandoning its previous offer in November. Rio reiterated last week that it remained committed to the Chinalco deal.