BHPB bid for Rio - Why Chinalco is buying

Business Week reported that the state owned Chinese aluminum giant Chinalco's new stake in the mining outfit is seen as Beijing's attempt to head off a BHP Billiton takeover to protect supply of iron ore although Mr Xiao Yaqing chief of Chinalco said that it has no plans to increase its stake further.

Chinalco insists that it is not acting on behalf of the Chinese government. The company has strongly denied unconfirmed reports over the past few days that China's sovereign wealth fund, China Investment Corp has assembled a USD billion war chest for Chinalco to use in blocking any possible BHP bid for Rio Tinto.

Mr Yaqing said that the investment in Rio is entirely Chinalco's own decision.

Regardless of Mr Xiao's denials, there is little doubt that Beijing has a strong interest in preventing a BHP-Rio Tinto deal, which was first proposed last November. If a merger were to go through it would create the largest single producer of iron ore, as well as of aluminum and other resources. The new company would have immense pricing power, potentially raising costs for Chinese steel producers.

Mr Ren Baifeng of Antaike however said that "From what we understand, is representing the Chinese government in this deal. Two Fridays ago, there was word that Rio Tinto's management was secretly in Beijing for talks about this deal."

Chinalco had teamed up with Pittsburgh based Alcoa earlier to spend USD 14 billion for a 9% stake in Rio Tinto making the largest overseas purchase by a Chinese company ever. Chinalco put up the lion's share, with Alcoa just pitching in USD 1.2 billion. The two paid USD 117.97 a share, a 21% premium over Rio's closing price the previous day.

Beijing based, majority controlled by the Chinese government, Aluminum Corp of China is a behemoth. Founded in 2001 in Beijing, it now has more than 200,000 employees, with 25 subsidiary companies. In 2007 it expanded its overseas investment into Australia, Peru, and Vietnam. And its Hong Kong listed company has a market cap of USD 20.2 billion. Its revenues grew 24.1% to USD 18 billion last year, while profits reached USD 2.78 billion.

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