Chinalco abandons Rio Tinto deal

China Aluminum Corp (Chinalco) in a surprise move yesterday decided to ditch its controversial US$19.5 billion investment in Australian mining giant Rio Tinto, the Financial Times reported. Shortly after the announcement, BHP Billiton said it would invest US$5.8 billion in a joint venture with Rio that will combine both firms’ iron ore assets in the Pilbara region of Australia. Had the Chinalco deal gone through, it would have been the largest ever outbound investment by a Chinese firm. But the state-owned aluminum giant lost interest amid rising criticism from shareholders in the UK and Australia and political resistance from the Australian electorate. Sources say Chinalco was particularly dissatisfied with the failure to agree on new terms for a US$7.2 billion bond issue, a core part of the acquisition agreement which looked increasingly unattractive to Chinalco as commodity prices rose, causing an upturn in Rio’s stock price. Rio management has begun working on plans to raise US$10 billion from other sources, including issuing new shares – the funds are equal to a payments due on a US$39 billion debt the company incurred recently. Shares in Rio fell 6.6% following announcement of the decision. Should Rio recommend a different deal, it is obliged to pay Chinalco a US$195 million "break fee."