Buoyant Rio seeks to form joint ventures with Chinalco

Rio Tinto is keen to use its growing relationship with shareholder Chinalco, the Chinese state-owned aluminium producer, to pursue joint ventures around the world and even increase its presence in China. Chinalco is now the largest shareholder in Rio, which yesterday reported record half-year underlying earnings, having bought a 9 per cent stake in a surprise dusk raid in February. Wayne Swan, Australia's Federal Treasurer, said last week that he would permit Chinalco, China's biggest aluminium producer, to buy up to 14.99 per cent of Rio's London-listed shares. This would equate to an 11 per cent stake in the mining company's combined Australian and London-listed stock. The Chinese company said yesterday it was "pleased that it now has the flexibility to increase its stake, should it choose to do so". Paul Skinner, Rio chairman, said Chinalco had not yet spelled out its long-term plan for its holding. Some analysts think Chinalco bought the shares as a way to block BHP Billiton's hostile takeover bid for Rio, launched last November and currently being scrutinised by antitrust regulators around the world. Others see Chinalco's holding as a way to be first in the queue if BHP succeeds in its bid but is forced to sell assets by the regulators. Mr Skinner said: "We are in the foothills of our relationship with Chinalco, but we expect the relationship to build and for there to be opportunities for co-operation." That could include the joint construction of port and rail infrastructure in Queensland, Australia, where the two companies have neighbouring bauxite mining projects. Tom Albanese, Rio chief executive, said that another area where the nascent relationship with Chinalco could benefit Rio was in better access to China's mineral deposits, which have great potential but have been under-explored. "There is potential for world class resources in China", he said. However, defining these resources would need a lot of exploration work using modern mining technology. "I have had this conversation with the Chinese government. We would like to explore more, but we would need more security of tenure first." Only 0.5 per cent of Rio's exploration budget is deployed in China at present, in part because of uncertainty as to whether the company would be allowed to retain control of any significant discoveries or whether the assets would be transferred to China's state-owned mining companies. Mr Skinner said Rio's relationship with Chinalco could put it in a better position to lead the western exploration effort in China if the government decided to encourage foreign companies to do so. "It should be a win-win situation, but it could take time. In the mining business we have to be patient." Rio's first-half results were "outstanding", said Mr Skinner, with revenues rising to $30bn (£16.3bn), from $13.9bn in the first half of 2007, largely thanks to higher iron ore prices and the acquisition of Alcan, the Canadian aluminium producer. Underlying earnings rose 55 per cent to $5.5bn, while pre-tax profits more than doubled to $9.69bn. Mr Skinner said that while BHP's takeover attempt had been something of a distraction for management, it "has almost had an energising effect" on the group and had enabled Mr Albanese to make changes swiftly and improve the efficiency of the business. Mr Albanese said that although there was "a lot of concern" in the market over the prospect of demand for Rio's products slowing down, he believed that commodity prices would remain high, supported by Chinese growth. "We do not see the drivers for a country-wide slowdown in China. If anything, we expect demand to pick up." ---Financial Times