Rio Tinto calls off $19.5-billion deal with Chinalco

Sydney - Anglo-Australian miner Rio Tinto PLC on Friday scrapped its $19.5-billion (U.S.) deal with Chinese firm Chinalco, choosing instead to raise $15.2-billion in a share sale and setting up a joint production venture with rival BHP Billiton Ltd.

Rio Tinto chairman Jan du Plessis said in a letter to shareholders the planned deal with Chinalco was now dead and his company would pay it a $195-million break fee, thus ending what would have been China's biggest overseas investment to date.

Investors will be offered 21 new shares for every 40 they hold at $28.29 Australian ($22.71 U.S.) each, the company said in a statement posted on the Australian stock exchange. Rio Tinto said the share deal would reduce the company's overall debt, allowing it to meet repayment obligations.

Rio Tinto turned to Chinalco - whose full name is Aluminum Corp. of China - in February to help repair a balance sheet weighed down by $38.7-billion in debt. A payment of $8.9-billion was due in October.

Under the now-scrapped deal, Chinalco would have invested $12.3-billion in joint investments in aluminum, copper and ore mining with Rio Tinto, and spent $7.2-billion on convertible bonds in the company. If redeemed for shares, the bonds would have almost doubled Chinalco's existing 9.3 per cent stake in Rio Tinto Group to 18 per cent.

But there has been speculation about the status of the deal for several weeks as the market has changed significantly since the deal was first struck.

In a statement, Chinalco president Xiong Weiping said the Chinese company had "worked hard" to "make appropriate amendments to the transaction terms ... to better reflect the changed market background and feedback from shareholders and regulators."

Mr. Xiong said the company still believed its proposal presented an "outstanding value-creating opportunity for all Rio Tinto shareholders and would have provided a strong platform for a long-term strategic partnership between the two companies."

"Although this deal did not go through, Chinalco's strategy of internationalizing its mining business has not changed in the least. Chinalco intends to continue developing its global mining and search for strategic opportunities," the company said.

The proposed deal with Chinalco sparked opposition in Australia, amid concerns that a foreign state-backed enterprise would own a strategic stake in the country's biggest natural resource assets.

Australia's Foreign Investment Review Board was due to make a decision on the deal, based on national interest, by the middle of this month, with Prime Minister Kevin Rudd's government then having the final say.

Mr. Rudd told reporters in Canberra he would be meeting with Mr. Xiong - who is currently in Australia - later Friday, saying, "We welcome Chinese investment in Australia."

"This has been a commercial decision reached by Rio in terms of its evaluation of the proposal put to it by Chinalco," Mr. Rudd said. "I think it's very important that our friends in China focus on that fact."

Earlier Friday, Rio Tinto and its rival and former suitor BHP Billiton announced they will set up a joint production venture comprising all of their iron ore assets in Western Australia state, a move expected to save them billions.

The companies have signed an agreement to establish the 50/50 joint venture, which covers all current and future iron ore assets and liabilities.

"Both companies believe the net present value of these unique production and development synergies will be in excess of $10-billion," BHP Billiton and Rio Tinto said in a joint statement.

Also, BHP Billiton will pay Rio Tinto $5.8-billion to equalize its contribution to the joint venture at 50 per cent.

Chinalco said it would be paying very close attention to the tie-up between Rio Tinto and BHP Billiton. Last November, BHP called off its proposed $68-billion takeover of Rio Tinto. China had been unhappy over the potential joining of the two huge mining companies, fearing it might give them inordinate say over iron ore pricing.