China's state-owned Chinalco is likely to participate in global miner Rio Tinto Ltd's $15.2 billion rights offer, a source briefed on the matter told Reuters on Wednesday, in a sign China was keen to retain its interest in the world's top iron ore miner.
By Denny Thomas
Strong demand for the Rio offer, the fifth-biggest on record, is expected to ease pressure on Rio to sell assets at throw-away prices and give it the stability to pursue growth amid signs that the global economy is on the mend.
"It's a period of recapitalisation for Rio and you can argue that this will give them some opportunity to grow without having to necessarily divest other assets," said Ken West, fund manager with Perennial Growth Management, which oversees $2.2 billion including Rio shares.
Rio is raising money to cut a $38 billion debt mountain it accumulated when it bought Canadian aluminium group Alcan at the top of the commodities market in 2007.
The key issue for Rio is to decide whether to sell some downstream Alcan assets now or hold them for 3-5 years to realise better value, West added.
Analysts said Rio was likely to stay away from any industry consolidation as mining group Xstrata Plc attempts to strike a merger with Anglo American .
"I can't see Rio taking on any big acquisitions in the near to medium term. They will probably go through a 3-year period of consolidation," West said. He declined to say if his fund took up its full entitlement in the Rio rights offer, which closes on Wednesday.
Rio shares fell as much as 3 percent, but by 6:34 a.m. had recouped some of those losses to trade down 1.2 percent, helped by reports that China may ease its demands for deep cuts in iron ore prices.
The benchmark S&P/ASX 200 index was off 2 percent.
CHINALCO TO BACK OFFER
Chinalco's relations with Rio soured early last month after the indebted miner called off a bigger equity partnership that would have seen the Chinese group invest another $19.5 billion into dual-listed Rio Tinto .
Instead, Rio ditched the deal in favour of the rights issue and an iron ore joint venture with rival BHP Billiton , raising howls of protest from China where state media characterised Rio as a "dishonourable woman."
A Chinalco spokesman based in Australia declined comment on the Rio rights offer. Rio Tinto officials did not return phone messages seeking comment.
The source declined to be identified as the decision was not yet public.
Rio's 21-for-40 rights issue was priced at a steep discount of A$28.29 per Australian-listed share and 1,400 pence per London-listed share.
Chinalco, Rio's top shareholder, owns about 9 percent of the combined group and a full take-up of the rights would cost it around $1.5 billion.
If Chinalco takes up its entitlement in full, it would bring down its average holding cost in Rio. Chinalco bought its initial stake at 60 pounds a share in February 2008 in a raid on the London-listed stock.
(Editing by Mark Bendeich)
SYDNEY (Reuters)