Rio Tinto commits to Chinalco

Rio Tinto shares surged yesterday after the mining giant reaffirmed its commitment to a US$19.5 billion ($33 billion) deal with a Chinese company.

The proposed transaction with Aluminum Corporation of China (Chinalco) also got a boost after United States regulators gave the green light to one aspect of the deal.

Shares in Rio Tinto were up 7.97 per cent, or A$4.56 ($5.83) to A$62.10 at midday Sydney time, after reaching a morning peak of A$62.82.

"The company remains committed to delivering this strategic partnership," Rio Tinto said in response to a query from the Australian Securities Exchange.

"The company continues to seek feedback from shareholders on this transaction and otherwise carry on its business in the usual course."

There was speculation on Thursday that Rio Tinto could alter or scrap the deal with Chinalco, struck in February, because the terms were overly generous to the Chinese state-owned company.

Shares in the world's third-biggest miner plunged 11.7 per cent, with some market watchers predicting the company could pursue a US$10 billion capital raising instead.

That prompted a "please explain" from the exchange about a fall in its share price to A$58.95 on Thursday, from A$71.60 on May 8.

Rio Tinto said it was aware of the market speculation.

The deal with Chinalco was struck when credit markets were very tight and is aimed at rasing funds to help it pay off some of its US$39 billion debt.

Investors in Australia and Britain have expressed discontent that Chinalco would be entitled to US$7.2 billion in convertible notes at a strike price of US$45.

The strike price represented a big premium to Rio Tinto shares when the deal was announced three months ago, but the stock has since rebounded.

Before the deal with Chinalco proceeds, Australia's Foreign Investment Review Board, Chinese regulators and shareholders in Australia and Britain must give it their approval.

IG Markets research analyst Ben Potter said Rio Tinto's statement yesterday about the deal had driven the share price gain.

"Yesterday's move was probably a bit of an over-reaction," he said.

"The market is generally stronger today, so we have seen a bit of a snap-back."

But Potter said there was still a very good chance the deal with Chinalco could fall through.

"It is just too unattractive at the current prices Chinalco is proposing," Potter said.

Meanwhile, the US Committee on Foreign Investment (CFIUS) has cleared an element of the deal, with Chinalco involving the sale of stakes in Rio Tinto's assets, including its Kennecott Utah copper operation in the US.

The companies got clearance from the CFIUS regarding the proposed issue of convertible bonds to Chinalco and the indirect minority investment in Kennecott.

"I would say it was expected," Potter said.

As part of the deal between Rio Tinto and Chinalco, the state-owned Chinese company will effectively acquire a 15 per cent stake in Hammersley Iron for US$5.1 billion.

Hammersley Iron is one of Rio Tinto's major iron ore assets, located in the Pilbara region of Western Australia.

- AAP