Aluminium the base for Chinalco, Rio

ANALYST attention is turning towards the potential for Rio Tinto and China's state-owned Chinalco to mend fences by proceeding with a deal on Rio's Queensland aluminium operations.

Much of the fallout from Rio's decision to walk away from Chinalco's $US19.5 billion ($A24.6 billion) refinancing deal last week has focused on BHP Billiton replacing Chinalco as Rio's preferred partner in Pilbara iron ore. But as one industry analyst pointed out yesterday, people seem to be forgetting that Chinalco is ostensibly an aluminium group.

In the now-dead Chinalco deal, the Chinese were to spend $US2.15 billion to acquire key stakes in Rio's Weipa (bauxite), Yarwun (alumina) and Boyne Island (aluminium) operations. It was also meant to acquire a $US5.1 million stake in Rio's Hamersley iron ore unit - the commodity in which BHP has gone one better by moving into a 50:50 joint venture with Rio for all their Pilbara interests for $US5.8 billion.

Analysts argue that given Chinalco's continuing 9 per cent shareholding in Rio and Chinalco's aluminium heritage, the prospect of high-level discussions on Rio and Chinalco setting out to come up with a revised Queensland deal are strong. Apart from anything else, it would "de-weight" Rio's overexposed position to the light metal following the disastrous 2007 Alcan acquisition.

China has become the world's biggest aluminium producer but suffers a high-cost status because of low-quality bauxite reserves. Securing a foothold in Rio's Weipa bauxite and alumina operations was one of Chinalco's motivations in pursuing the original Rio refinancing deal. The deal would also have allowed the pair to control the Weipa resource in much the same way as Rio and BHP plan to with iron ore in the Pilbara. Weipa ranks as a world-class resource as much as Pilbara does in iron ore.

Meanwhile, BHP managing director Marius Kloppers has told analysts that BHP's interest with Rio does not stop in the Pilbara. He raised the prospect of more joint ventures in regions where both companies were active. The pair are already joint venturers in Escondida copper in Chile, and the RBM minerals operation in South Africa.

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