Could China Save Rio Tinto?

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Commodities

Rio Tinto’s $39 billion debt load still threatens the company’s well-being, but help from China could save the struggling global mining company.

Rio Tinto already considered an equity cash call, but there are other possibilities to consider. Earlier this week, Rio began talks over a possible $10-20 billion deal with Chinalco, the leading aluminum group in China. As Rio faced a hostile bid from BHP Billiton last year, Chinalco swooped into the game to buy a nine percent stake in Rio, spending $14.3 billion and taking their place as Rio’s biggest shareholder. Could Chinalco’s support allow Rio to reach their goal and pay off $10 billion in debt this year?

Although Rio has faced hardship with their insistence on the best prices during difficult economic times (oh, and that little issue when the company bought aluminum group Alcan at the worst possible time), Rio could still help China, even as the company prepares to pay $8.9 billion dollars in October. “Rio fits into Beijing’s plan to secure access to raw materials, a long-term priority unlikely to be derailed by a cyclical downturn. Last year, excluding Chinalco’s Rio investment, the value of acquisitions made by Chinese resource companies more than quadrupled,” the Wall Street Journal explains. However, the newspaper adds the following:

… a large deal could be difficult. Chinalco’s Rio holding has fallen 75% in value already. A twitchy Australian government has placed a 15% cap on Chinalco’s stake, although a convertible issue could possibly finesse that. Political considerations also might limit its ability to take stakes in individual mines.

BHP Billiton withdrew their $66 billion bid for Rio Tinto in November.

–Amy Edwards

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