Rio Tinto in asset sale talks with Chinalco

Special Report:Global Financial Crisis

BEIJING, Feb. 3 -- Rio Tinto Group, the world's third-largest mining

company, is in talks to raise cash from Aluminum Corp of China, tapping its

largest shareholder to reduce 38.9 billion U.S. dollarsof debt.

Aluminum Corp, known as Chinalco, may buy convertible debt in Rio Tinto and

or minority stakes in some of its units, the London-based company said on Monday

in a statement. The sales may raise as much as 15 billion dollars, UK's Sunday

Telegraph reported on Sunday. Rio's shares closed 5.5 percent higher in Sydney.

Rio's Chief Executive Officer Tom Albanese, who rejected a takeover offer

from BHP Billiton Ltd, is studying a share sale after commodity prices plunged

the most in more than 50 years in 2008 and the company's debt ballooned 19-fold

with the purchase of Alcan Inc.

"Raising money would alleviate the debt monkey off their back," said Glyn

Lawcock, head of resources research at UBS AG in Sydney. "If they can get a

decent asset sale away to the Chinese and raise $5 billion then that would be

extremely positive."

Chinalco is in initial talks to buy assets from Rio, the company's Vice

President Lu Youqing said Monday.

There is no certainty of an agreement with Rio because Rio is also talking

to other people, Lu said. Any agreement would need government approval and

depends on prices, he said, declining to give details on the assets.

The Chinese company may want to buy stakes in Rio's Gove or Queensland

Alumina operations in Australia, the Escondida copper mine in Chile or Coal

Allied Industries Ltd, UBS' Lawcock said. It may also be interested in

Rio's iron ore unit, he said.

"Strategically, the purchase of Rio assets will benefit Chinalco as China

is lacking all of these materials and demand will be sustainable," Heng Kun,

analyst at Essence Securities, said. "From a price point of view, it's a good

opportunity to buy now as they are cheap."

Chinalco joined with Alcoa Inc to buy a 9 percent stake in Rio for 7.2

billion pounds in February 2008, three months after Melbourne-based BHP proposed

the takeover. BHP abandoned the hostile 66 billion dollarsbid in November,

citing Rio's high level of debt and declining commodity markets.

Rio has declined 33 percent since then and its London shares are now

trading 75 percent below the 6,000-pence-a-share price paid by Chinalco and

Alcoa.

Mining companies including Xstrata Plc and Newcrest Mining Ltd are planning

to sell stock to bolster capital and cut borrowings. Rio, forced to halve

spending and cut 14,000 jobs to counter the global recession, had its market

value fall below its debt in December. It has 38.9 billion dollarsof debt

and a market value of 38.5 billiondollars at its year-low in December.

Rio has a net debt-to-shareholders' equity ratio of 126 percent, compared

with BHP's ratio of 22 percent and a ratio of 22 percent for Anglo American Plc.

"Rio bought an asset at the top of the market, took on too much debt

and now they're paying for it," said Brad Shallard, who manages the equivalent

of 19 milliondollarsin shares including Rio stock for Katana Capital Ltd in Perth.

"Chinalco would have the whip hand in any deal."

(Source: China Daily/Agencies)