When the Aluminum Corporation of China (Chinalco) and US aluminum producer Alcoa bought a 12 percent stake in Rio Tinto with USD 14.05 billion in February 2008, they did not expect that the Rio Tinto share price would decline by 70 percent within the space of just a single year, resulting in a loss on paper of USD 10 billion on Chinalco's side.
However, Rio Tinto is the more unfortunate party as its debt has increased to nearly USD 40 billion following its purchase of Canada's Alcan in 2007. Rio Tinto has to repay USD 10 billion of the debt by the end of 2009, but it is unable to obtain loans from commercial banks because of the global credit crisis. Though it sold many of its assets to raise money, Rio Tinto has still been obliged to seek capital from new investors in order to make up the shortfall.
At the beginning of February 2009, there was a rumor that Rio Tinto was negotiating with Chinalco for finance in the range of USD 9 billion to USD 15 billion. Lu Youqing, vice president of Chinalco confirmed the news that the two parties were in negotiations but had yet to reach an agreement. Due to the sharp decline of Rio Tinto's stock price, if the negotiations were successful Chinalco would be able to purchase at a lower price.
As talks proceeded, news came that both Chinalco and Rio Tinto were making personnel changes among their senior management teams. It is obvious that the replacement of Jim Leng, Rio Tinto's newly-elected board chairman, was intended to pave the way for the two parties to reach agreement. Mr. Leng issued a statement saying that he quit because he had different ideas from the management regarding the approach needed to deal with the company's debt; notably, the other board members were excited about obtaining further investment from Chinalco, the biggest shareholder in Rio Tinto. At the current economic juncture, large corporations in the West are now unable to put together sufficient funds to purchase Rio Tinto's shares and assets, and the interests of the existing shareholders would be diluted if shares in Rio Tinto were sold off through the stock market. As a result, Chinalco was practically the only logical choice for Rio Tinto.
After strenuous efforts by both sides, an agreement was finally reached on February 12, 2009. According to the agreement, Aluminum Corp. of China (Chinalco) will invest $19.5 billion in Rio Tinto Group, easing the Anglo-Australian miner's heavy debt burden while securing Chinese access to long-coveted mining resources. The deal is China's biggest overseas investment to date and will almost double Chinalco's existing 9.3 percent stake in Rio Tinto Group to 18 percent. Meanwhile, the deal entitles Chinalco to nominate two non-executive board members to join the company's 15-member board.
Rio Tinto will retain operational control of the joint ventures, with the Chinese company holding a maximum stake of 50 percent in the aluminum mine at Yarwun, Australia. Chinalco's stakes in other joint ventures will range from 15 percent to 49 percent.
After the announcement of the agreement, some small shareholders expressed their dissatisfaction that the deal, in their view, had inclined too much towards Chinalco's side, and they stated their concern that their interests would not be looked after. Experts believe that Rio Tinto made its choice based on its eagerness for capital to relieve its debt burden and cash flow pressures; otherwise it would have had to face bankruptcy.
Though the two parties have already reached agreement, there still remains a question over whether the project will be approved by Rio Tinto's shareholders and by the Australian government.