Rio Tinto moves to slash Chinalco stake via asset deal

[Ben Graham]

Rio Tinto (ASX: RIO) is reportedly in talks with China’s state-owned Chinalco over an asset-for-equity swap that would cut Chinalco’s stake in the world’s second largest miner to about 11%.

The deal, according to Reuters sources familiar with the matter, would see Chinalco exchange part of its Rio Tinto holdings for stakes in some of the miner’s key assets. The move could free Rio to restart share buybacks and pursue new strategic deals that have been constrained by its complex ownership structure.

Neither Rio Tinto nor Chinalco provided immediate comment.

The Chinese miner first acquired a near 15% stake in Rio Tinto Plc, the London-listed arm of the dual-listed company, in 2008. The purchase came with strict Australian government conditions, including a ban on raising its stake without approval and no board representation.

That investment became a flashpoint a year later, when Chinalco’s proposed $19.5-billion bailout for Rio, which was then struggling with $39-billion in debt, was blocked by regulators and shareholders wary of Chinese control over strategic mining assets.

Simandou, Oyu Tolgoi in sight

The proposed asset swap may now help resolve long-standing governance hurdles. Among the projects that could be part of the deal are Rio’s massive Simandou iron ore in Guinea, already 75% Chinese-owned, and the Oyu Tolgoi copper mine in Mongolia. Another option under review is Rio’s titanium business, which is part of a broader restructuring by new chief executive Simon Trott.

Trott, who took over in August after leading Rio’s iron ore division, is driving an overhaul to streamline operations into three main units: iron ore, copper, and aluminum–lithium.

The talks with Chinalco come as activist investors renew pressure on Rio to abandon its dual Anglo-Australian listing, arguing it creates governance friction and complicates deals in countries with restrictions on Chinese investment.

(With files from Reuters)