Chinalco to restructure Rio Tinto deal

Chinalco will offer material concessions to its proposed $19.5bn investment in Rio Tinto in a late attempt to secure regulatory clearance from the Australian government and win the support of the Anglo-Australian group’s hostile shareholders.

The state-owned aluminium group is prepared to recast the deal to limit its stake in Rio to 15 per cent, down from the 18 per cent it hoped to secure when it agreed to buy $7.2bn of convertible bonds in February. Chinalco’s current stake is 9 per cent and the Chinese group also wants to invest $12.3bn for a large minority stake in Rio’s mining assets.

The concession would not only make it harder for Canberra to block the deal amid a divisive political and business debate that China should not own and buy some of Australia’s top resource assets, but would also appease Rio shareholders by making available the 3 per cent of Rio equity Chinalco is prepared to sacrifice.

Two people close to the situation said nothing solid had been agreed but that the Chinese group recognised changes were required and it wanted to make its position clear.

Chinalco would not be prepared to go below a 15 per cent equity stake and would not sacrifice the minority stakes it has agreed to buy in Rio’s assets, including a 15 per cent stake in the Western Australian iron ore assets, one of the people said.

At the start of the year, Rio had few options than to turn to Chinalco in order to address a balance sheet bloated with debts of close to $40bn. However, improved equity markets and a vocal response from UK and Australian shareholders who have said they would back a large capital-raising have served to undermine the original deal.

Chinalco is also understood to be sticking with its demand to have two Rio board seats but is prepared to offer concessions on marketing provisions, proposed “off-take” arrangements covering iron ore production, and corporate governance conditions relating to the mining assets where it would hold minority stakes.

Australia’s Foreign Investment Review Board has until June 15 to review the Chinalco deal based on Canberra’s “national interest” tests, which includes investments made by sovereign entities. That probe may be extended if a watered-down proposal is made by Chinalco in the coming weeks, delaying shareholder votes to approve a deal planned for July.

Rio declined to comment. The shares fell 7.2 per cent, at £26.57.