China Invests $19 Billion in Rio Tinto

The Chinese state aluminum company Chinalco announced on Thursday the largest investment by Beijing in a foreign company to date, pouring $19.5 billion into the struggling mining company Rio Tinto.

The two companies announced that through this strategic partnership, Chinalco will acquire stakes in ore-related assets, as well as convertible bonds into Rio Tinto shares, potentially increasing the Chinese partner’s stake to at least 15 percent. According to the agreement, Chinalco will invest $12.3 billion in purchasing stakes in projects related to aluminum, bauxite, copper, and iron ore, and will also buy $7.2 billion worth of bonds that will later be converted into Rio shares. "This step reflects our continued confidence in the long-term prospects for this industry and the Chinese economy," said Chinalco President Xiao Yaqing regarding the agreement.

"Chinalco will play a significant role in a strong company with excellent growth prospects." However, the agreement, which will undoubtedly secure China greater power regarding the resources and raw materials responsible for the boom in its economy, faces obvious unexpected obstacles, as Australia recently announced changes to its foreign investment laws just before the announcement. Thus, the announcement by Australian Finance Minister Wayne Swan about planned changes to the laws just before the agreement’s announcement signals that the Australian government will closely scrutinize the contract.

Before the global economic crisis, the almost insatiable Chinese demand for mineral resources helped support a decade-long boom in Australia, and China remains a key market for the Australian resource sector. Rio Tinto, the world’s largest aluminum producer, second in the world for iron ore production, and among the top five copper producers, emphasizes that the cash injection will directly enable it to address its enormous debt burden. The news of the agreement between the two companies coincided with the announcement of a 50 percent drop in its annual net profit compared to the previous year, citing global slowdown and falling commodity prices as the reasons. Rio’s chief Tom Albanese highlighted that the company is now focused on debt repayment.

Analysts say that the agreement reflects China’s growing economic power in the global market and its desire to secure a larger share of the world’s natural resources."The agreement reflects China’s growing strength and engagement," said Wang Jinahua, deputy director of the Shanghai research institute Mysteel. "When its capital reaches certain levels, it must expand," he explains. (H)