Rio Tinto Scraps $19.5B Chinalco Deal

By Kristen Gelineau

SYDNEY -- Anglo-Australian miner Rio Tinto (RTP Quote) scrapped its $19.5 billion deal with Chinese firm Chinalco, choosing instead to raise $15.2 billion in a share sale and setting up a joint production venture with rival BHP Billiton(BHP Quote).

Rio Tinto Chairman Jan du Plessis said in a letter to shareholders the planned deal with Chinalco was now dead and his company would pay it a $195 million break fee, thus ending what would have been China's biggest overseas investment to date.

Investors will be offered 21 new shares for every 40 they hold at 28.29 Australian dollars ($22.71) each, the company said in a statement posted on the Australian stock exchange. Rio Tinto said the share deal would reduce the company's overall debt, allowing it to meet repayment obligations.

Rio Tinto turned to Chinalco -- whose full name is Aluminum Corp. of China (ACH Quote) -- in February to help repair a balance sheet weighed down by $38.7 billion in debt. A payment of $8.9 billion was due in October.

Under the now-scrapped deal, Chinalco would have invested $12.3 billion in joint investments in aluminum, copper and ore mining with Rio Tinto, and spent $7.2 billion on convertible bonds in the company. If redeemed for shares, the bonds would have almost doubled Chinalco's existing 9.3% stake in Rio Tinto Group to 18%.

But there has been speculation about the status of the deal for several weeks as the market has changed significantly since the deal was first struck.

In a statement, Chinalco President Xiong Weiping said the Chinese company had "worked hard" to "make appropriate amendments to the transaction terms ... to better reflect the changed market background and feedback from shareholders and regulators."