Sydney: Global miner Rio Tinto Ltd said it had held talks to sell some assets to Chinese government-owned aluminium maker Chinalco, its biggest shareholder, reportedly to cut debt by up to $8 billion.
The Australian newspaper reported on Monday that Rio was looking at a combination of asset sales, convertible notes and share issues that would generate $15 billion in total and lift Chinalco’s Rio stake to more than 11% from 9% now.
It said Rio was close to clinching asset sales to Chinalco.
In a statement responding to the media speculation, Rio said there was no certainty a transaction with Chinalco would take place. The talks centred on “minority interests in various operating businesses of the Rio Tinto group and also investing in convertible instruments,” Rio said.
Though in urgent need of cash, Rio was not conducting a fire sale of its assets, analysts said. Rio has $8.9 billion in debt due in October and another $10 billion due in October 2010.
Rio said on Friday it would sell potash assets for about $850 million and its Corumba iron ore mine in Brazil for $750 million to Vale, which ranks ahead of Rio as the world’s biggest iron ore miner. Analysts said the prices for the assets were fair.
“Rio has not said specifically what it is going to sell to Chinalco, but you’d think it would involve alumina or aluminium and possibly coal in Australia,” said James Wilson, analyst with DJ Carmichael & Co in Perth.
“For $8 billion, it’s going to be something serious.”
Rio shares rose 4.7% in London to 1,577 pence by 1001 GMT, outperforming a 1.4% loss in the UK mining index. Bigger rival BHP Billiton Ltd/Plc fell 2.5 %.
Analyst Michael Rawlinson at Liberum Capital in London said a successful deal with Chinalco would be good for the mining sector as a whole.
“There is one less rights issue to fund and there is evidence that the biggest consumer of global commodities is still anxious to pay up for access to key minerals,” he said.
Rio is considering several options, including an equity raising, to generate cash, backpedalling after Chief Executive Tom Albanese had previously said there was no need to sell shares to meet debt-cutting targets.
It is likely to decide which option to pursue by the time it reports 2008 results on 12 February.
Any additional interest taken by Chinalco would be limited given restrictions on how much of Rio the Chinese firm could buy under Australian foreign investment rules.
At present, Chinalco cannot own more than 14.99% of the company, though it could apply for a waiver to raise its stake up to 19.99%.
Australia’s treasurer, Wayne Swan, declined to speculate on that specific issue when questioned during a press conference.
“But we welcome foreign investment. We have a set of guidelines and a national interest test with those guidelines,” he said.
Two sources with direct knowledge of the situation said Chinalco, parent of listed aluminium producer Chalco, is in talks with China Development Bank to secure financing if a deal is struck.
Chinalco and CDB declined immediate comment.
Chinalco, together with Alcoa Inc, bought a 9 % interest in the London and Australia-listed Rio last year, paying about $14 billion financed by CDB to become its top shareholder.
Since then, the investment has lost around 75 % of its value as global financial turmoil and recession fears have driven steep declines in metals prices.
“CDB is involved in the situation because Chinalco needs CDB’s support for loans as it did for the first deal,” one of the sources, who asked not to be named, told Reuters.
Analysts said they were not surprised by Chinalco’s growing interest in Rio, as Chinese firms were expected to start moving on foreign mining companies, which look cheap at present given the downturn.
Rio has close to $39 billion in debt, linked to its acquisition of Canadian aluminium group Alcan in 2007 when commodity markets still appeared impervious to the worsening global financial malaise and while BHP Billiton Ltd/Plc was mounting a hostile takeover bid for Rio.
Metals markets have since collapsed and BHP walked away without buying a single Rio share.
Rio hopes to pay off about $10 billion of debt this year by cutting costs, axing 14,000 jobs, and selling businesses. So far, it has sold or is selling around $4.7 billion worth of assets.