Chinalco preparing to increase stake but not moving quickly

Chinalco has authorized a special team to watch for an opportunity to increase its stake in Anglo-Australian iron ore giant Rio Tinto to the permitted 14.99%, Youqing Lu, the vice president of Chinalco, told dealReporter. However, a stake increase would not be an immediate move as Chinalco needs to strengthen itself both in finance and management first, agreed Lu and other three sources close to Chinalco.

Since BHP Billiton withdrew its bid for Rio Tinto, the Chinese state-owned metal giant is no longer under pressure to fend off BHP any more. However, Chinalco¡¯s interests in Rio is long term and strategic, the first source close to Chinalco said, adding that Chinalco would go on to expand its controlling power in Rio during the downturn of the global commodity market.

Despite the painful adjustment of the global iron ore market, Chinalco still sees great potential in Rio and will pursue greater control, said Lu and the first source. Lu believed that China¡¯s demands for iron ore resources would last for a long time because China still needs to develop its vast western region.

Chinalco would probably not have adequate financial resources to increase its stake in Rio immediately, the first source and the second source close to Chinalco said. Chinalco is pursuing a government capital injection of CNY 60bn (USD 8.77bn), the first source revealed. 

According to a Chinese government advisor, the central government has encouraged large Chinese companies to go outside and buy resources companies while the commodity market is low. 

Asked whether Chinalco would buy Rio Tinto shares in Australia or still in London, he said Rio Tinto share prices were almost same in the two markets, in contrast to Chalco shares which are priced differently in Hong Kong and in Shanghai.

Chinalco announced its stake in early February after an on-market dawn raid led by Lehman Brothers.

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