Alcoa And Chinese Rival Buy 12% Stake In Rio Tinto

SHANGHAI — The state-owned giant Aluminum Corporation of China and the Aluminum Corporation of America stunned analysts and investors Friday by buying a minority stake in Rio Tinto, the world’s third largest mining company.

The stealth move was months in the making, but executed in one day, as the Chinese company moved to buy up shares of Rio Tinto, underscoring two fundamental realities: the strategic significance of mining in a resource-stretched age and China’s formidable and still largely untapped economic might.

The $14 billion bid by Aluminum Corporation of China, or Chinalco, and Aluminum Corporation of America, Alcoa, to acquire 12 percent of Rio Tinto’s London shares set the stage for a fierce battle for control of the company.

It came just days before BHP Billiton, the biggest mining company in the world, was expected to formally offer its own bid to buy all of Rio Tinto for about $130 billion. The deal announced Friday was also by far the largest overseas investment ever made by a Chinese company and the strongest indication yet that state-controlled companies here intend to be global players and to protect China’s strategic interest. China is the world’s largest producer of steel and needs iron ore, which is used in making steel.

Though Chinalco has a history of making overseas acquisitions, the move seemed largely intended to block a BHP acquisition of Rio, analysts say.

“The Chinese are probably the best capitalists that communism will ever have given birth to,” said Michelle Applebaum, head of an independent steel equity research firm in Chicago.

“The J.V. with Alcoa was a key strategic move, in our view,” she said, referring to the joint venture and noting Alcoa’s reputation as “one of the world’s most responsible conservators of capital” and the political pull of its former chairman, former Treasury secretary Paul O’Neill.

China knows the power of politics. Three years ago, the state-owned Chinese oil giant CNOOC sought but failed to acquire the Unocal Corporation, the American oil company, for about $20 billion, after opposition arose in the United States

Now, China appears to be making another bold play to capture the natural resources it needs to fuel its fast-growing economy. In recent years, it has made aggressive forays into other parts of the world, including Africa, seeking to acquire oil and other increasingly scarce natural resources at a time when commodity prices are soaring.

Last year, China’s state-controlled sovereign wealth fund — another increasingly visible and controversial measure of the new wealth of the nation — invested in the private equity firm Blackstone. Later, it paid about $5 billion to buy a small stake in Morgan Stanley.

The Rio bid, however, appears to be largely defensive. Analysts say Beijing officials are worried that if BHP and Rio merge, the new entity, which would control 60 percent of iron ore production, would be able to dictate the prices of commodities vital to China’s growth.

A merger of BHP and Rio Tinto would be one of the largest in history, creating a global mining giant with a market value close to $350 billion.

BHP executives argue that a merger with Rio Tinto would allow the two companies to expand output more rapidly and reduce costs for major customers while reaping fatter profits.

Chinalco and Alcoa said they had formed a special corporation based in Singapore called Shining Prospect to acquire the Rio stock Friday.

Most of the $14 billion came from Chinalco, which is ultimately controlled by the government in Beijing. Alcoa, which is based in Pittsburgh, contributed only about $1.2 billion to purchase the Rio stake.

But many analysts said the Chinese are unlikely to risk exciting a political or economic reaction by taking over Rio completely.

“The Chinese metals ministry has positioned itself to ultimately create a long position — but not a control position — upstream in many of its metals markets that has eluded the nation to date,” Ms. Applebaum said. "We believe that the Chinese recognize that control will likely be elusive — if not impossible — and that ownership of its raw material resources is key to the future.”

Shares of most of the companies involved rose Friday in trading in New York, London, Sydney and Shanghai. Shares of Rio soared 13 percent in London.

Chinalco and Alcoa said they did not intend to make a bid for all of Rio Tinto, which also has large aluminum holdings, in the coming months, but that if another suitor came along, other than BHP Billiton, they might join such a bid.

The statement, analysts say, was a hint that the two could team up with other companies or entities, possibly from China, to bid for all of Rio and wage a tough takeover battle with BHP, driving up the price of Rio shares.

Chinalco, which is based in Beijing, issued a statement Friday evening, saying: "Our acquisition of a significant strategic stake in Rio Tinto Friday reflects our confidence in the long-term prospects for the rapidly evolving global mining sector."

An Alcoa spokesman was also circumspect. "”As of now, our intention is to make this investment and that is it," the spokesman, Kevin Lowery, said.

A Rio Tinto spokeswoman in London, Faeth Birch at Finsbury, a public relations firm, said, "This reinforces our position that BHP’s proposal undervalues Rio Tinto."

BHP declined to comment Friday.

That a Chinese company would move so decisively into the center of a takeover attempt by BHP is not surprising.

Last November and December, when BHP officials were traveling in China to talk to Chinese government officials about what impact a merger with Rio might have on Chinese purchases of iron ore, the state-controlled press was filled with rumors about a Chinese government-backed bid for Rio, possibly from the state-owned steel maker Baosteel, one of the country’s biggest consumers of iron ore.

But Baosteel executives later disputed the reports, and analysts said it would be difficult for any Chinese company to bid for a company whose value could climb to well over $160 billion in a takeover battle.

Few companies in the world have that kind of cash or stock value, and any Chinese company making a bid would be heavily scrutinized by investors and government authorities in London and Australia, where Rio has many of its operations, partly because of suspicions that the Chinese government could be behind the deal.

Now, however, executives involved in the takeover deal have no doubt that the Chinese government is prepared to play a role in the outcome of the Rio takeover battle.

Neither Chinalco nor Alcoa have the cash or stock to make a $150 billion bid, analysts say. Shares of Alcoa are worth about $30 billion and Chinalco shares in China are worth about $50 billion.

David Barboza reported from Shanghai and Julia Werdigier from London. David Lague contributed reporting from Beijing.

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