Analysts question logic of Rio deal with Chinalco

When Rio Tinto signed its $19.5-billion deal with Aluminum Corp. of China Ltd. (Chinalco) in February, metal prices were low, share prices were lower and the company was sitting on a $38-billion mountain of debt.

But now that metal prices appear to have bottomed out and Rio's share price is inching higher, some are beginning to question whether the Chinalco deal still makes sense¡ªincluding, perhaps, the company itself.

According to market reports, Rio Tinto may be looking to scrap its transaction with Chinalco in favor of exercising a rights offering, an alternative that would allow the London- and Melbourne-headquartered company to raise funds without a cash injection from the Far East.

A source close to the company said last month that Rio Tinto had prepared a rights issue contingency plan underwritten by JPMorgan Cazenove and Credit Suisse Group, a move that the company did not confirm at the time. But with the Chinalco deal stalled by the Australian government and proving widely unpopular with shareholders, the company may be dusting off its back-up plans once again.

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