Chinalco takes its Rio Tinto entitlement

Aluminum Corporation of China (Chinalco) yesterday announced that it took up its full entitlement in the UK part of Rio Tinto's $15.2 billion rights issue. The results of the Australian part of the offering, which accounts for $3.4 billion of the total deal, are expected to come out today.   

"Chinalco can confirm that it has taken up all its rights in Rio Tinto plc," Chinalco said in a written statement. "This was an economically rational decision as it prevented the dilution of our ownership in Rio."

Chinalco retains a 9% stake in Rio. Earlier this year it tried to increase that stake to 18% but the deal fell through when Rio decided against strengthening its relationship with Chinalco, and instead opted for a joint venture with Australian mining company BHP Billiton. The rights issue was then launched to fund the new deal.

The entitlement ratio for the offering was 21 rights shares for every 40 existing shares. The price was £14 ($22.37) a share for its London shareholders, which represents a discount of approximately 38% to the theoretical ex-rights price (Terp) of £22.65 and a 48.5% discount to the closing price on June 4, the last day of trading before the deal was announced. This is a bargain price compared to what Chinalco paid in January last year to acquire its 9% stake -- back then it paid £60 a share, which was a 21% premium to the share price at the time.

Rio Tinto received valid acceptances in respect of 508 million new shares, which translates to 97% of the shares that were on offer. According to the underwriting obligations, Credit Suisse and J.P. Morgan Cazenove will have to find subscribers for the remaining 15.8 million shares.

That Chinalco took its entitlement is not much of a surprise, but there is uncertainty surrounding the Chinese company's medium-term plans. In yesterday's statement, the company said that it remains optimistic in the metals industry and that it will continue to look for opportunities to advance its strategic objectives. With regards to Rio though, the company was somewhat cryptic: "Chinalco will, as the company's current single largest shareholder, continue to monitor developments at Rio."

A research report published by Citi on June 23 accurately predicted that Chinalco would take its rights, but it said that "there is no guarantee that they will maintain the investment, potentially creating an overhang of [Rio Tinto] stock."

Regardless of whether or not Chinalco keeps its stake, Rio's joint venture with BHP will remain highly dependent on Asian buyers since China purchases 47% of Australia's iron ore and Japan takes another 25%. Although the joint venture does not need the approval of either of these countries, if they disapprove, they could react by imposing tariffs on its products. With bulk products like iron ore, the effects could be serious as the tariffs would make its products less competitive compared to alternatives.

In related news, Chinalco's listed subsidiary, Chalco, on Wednesday announced that it is to apply to the Chinese Securities Regulatory Commission (CSRC) for approval to issue up to 1 billion A-shares, representing 10.44% of the company's A-shares currently in issue and 6.88% of its total enlarged share capital. The shares will be placed with no more than 10 investors. Once the company receives approval, it will issue the shares within six months.

The total proceeds will not exceed Rmb10 billion ($1.47 billion). The capital raised will be spent on alumina projects in Chongqing and Xing Xian. The remainder will be used on expanding an ore-dressing processing plant in Zhongzhou.