Tom Albanese, Chief Executive of Rio Tinto. (Shaun Curry/AFP/Getty Images)
As part of the biggest overseas investment by a Chinese company, Chinalco will spend $12.3 billion on stakes of up to 50 percent in nine of Rio's mining assets.
It will also buy $7.2 billion of bonds convertible into shares of the world's largest aluminium maker, second-largest iron ore miner and a top-five copper producer.
Chinalco, the parent of listed Aluminum Corp of China Ltd (Chalco), will potentially double its stake in Australia and London-listed Rio to 18 percent, Rio said, denying it was selling out its independence to China.
"They had backed themselves into a corner, but a positive is the $20 billion of cash in the door straight away as that fixes the immediate balance sheet problems," said Northward Capital fund manager Michael Bentley.
"On the offsetting side, they've had to sell away part of the farm and particularly the iron ore assets, which are the jewel."
Close government scrutiny
The plan is likely to face close scrutiny from the Australian government, which wants to ensure investments by foreign state-owned entities do not come with political or strategic strings.
Shortly before Rio's announcement, Australian Treasurer Wayne Swan said the government would immediately tighten foreign ownership laws by treating convertible debt as if it were equity.
Chinalco President Xiao Yaqing told reporters through an interpreter that he had been aware of the proposed change and did not see Swan's announcement as a negative signal.
"We're also very pleased to have access to some tier one, world class assets as well as the expertise of a world class management team," Xiao said. Rio's deal with Chinalco could come up against Rio's former suitor, bigger rival BHP Billiton, which may counterbid for some of the assets Chinalco is set to pick up, the Times Newspaper said on its website.
Rio said it was open to higher offers from third parties.
The bailout by Chinalco represents a backdown for Rio CEO Tom Albanese and the board, which last year fiercely opposed a takeover offer from BHP which was worth more than twice as much as Rio's shares now fetch.
Rio Tinto's chairman-elect Jim Leng quit the board this week in protest over the pending deal with Chinalco. Albanese said Leng was in a minority of one.
"It's clear that of all the options we considered ... this deal offers far, far superior value to shareholders," Albanese told reporters, adding Rio had been in talks with Chinalco since mid-2008.
Rio's shares are down by around a fifth since BHP scrapped its $66 billion hostile offer in November, hit also by investor concern over Rio's $39 billion debt load, taken on when it bought Canadian firm Alcan in 2007.
"Rio's board must be beside themselves having to do this. It's very unfortunate timing, buying at the top and selling at the bottom and you might have expected more given Rio's previously exemplary track record," said Mark Pervan, senior commodities analyst at ANZ bank.
Rio plans to use the money to make early payments on $8.9 billion in debt due in October and $10 billion due late next year.
UBS analyst Glyn Lawcock in Sydney said the asset sales were priced at around a 14 percent premium to his valuation.
"At the end of the day, they've removed the debt issue for the next couple of years, which is a positive. It enables them to move ahead with expansions again now, should the market require them," he said.
Rio insisted its relationship with Chinalco would be at "arm's length".
Rio, the world's third-biggest diversified mining group by market value, announced the tie-up along with a 38 percent increase in full-year underlying earnings to $10.3 billion, ahead of market forecasts, but wrote down its aluminium business by $7.9 billion.
Criticism
At least two fund managers and analysts in Australia said Rio could run into problems when shareholders vote on the deal, which Rio said needed shareholder, government and regulatory approval.
Criticism has focused on Rio allowing a big state-owned customer, which has an incentive to keep prices down, so much influence over the group and direct stakes in prized assets.
"This approach is a bit of a worry. They seem to have favoured one shareholder over all the others," said ABN AMRO analyst Warren Edney.
Rio shares were on a trading halt in Australia, but the cost of insuring its debt fell on word of the Chinese investment, with Rio's credit default swaps at one point falling 100 basis points to 525 bps, or $525,000 a year for five years to insure $10 million in debt.
Rio's shares were up 3.3 percent in early London trading.
Chinalco will invest $12.3 billion in three strategic partnerships with Rio across its copper, aluminium and iron ore divisions, taking stakes in mines and assets at Weipa, Yarwun, Boyne & Gladstone Power, Escondida, Kennecott, Grasberg, la Granja and Hamersley Iron.
Rio said Chinalco would take 49.5 percent of Rio's 30 percent stake in Escondida, the world's biggest copper mine. BHP owns 57 percent of the Chilean mine. Escondida alone produces enough copper to satisfy about a fifth of China's needs.
Morgan Stanley and Credit Suisse advised Rio Tinto; JP Morgan, Nomura, Blackstone and CICC advised Chinalco.
