Market upturn may deflate Rio-Chinalco deal

LONDON (Reuters) - Prospects may dim for Rio Tinto's $19.5 billion proposed link-up with Chinalco if strong markets boost the attraction of a rights issue and investors believe a new chairman is more willing to consider alternatives. A buoyant share price could embolden disgruntled shareholders to vote down the deal that would see China's top aluminum maker double its Rio stake and buy portions of key mines. Although political opposition has grown in Australia to the prospect of Rio (RIO.L) (RIO.AX) linking up with a Chinese state-owned firm, a more serious threat might be a recovery in metals markets, analysts and shareholders say. A higher share price would make dilution from a rights issue less painful while an upturn could mean that Rio has more chance to sell non-core assets and raise cash to trim its heavy debt. "A lot depends on how positive the markets are feeling. The more positive it feels about an area, the less likely it is to want the company selling assets and the more prepared it will be to fund and keep a 100 percent ownership," said an official at a top-10 shareholder of UK Rio shares, who asked not to be named. Rio shares have gained 37 percent so far this year, outperforming the UK mining index .FTNMX1770 by a quarter and making dilution from any rights issue less onerous. "Shareholders' decision on the Chinalco transaction may be based on how the global economy acts in the coming few months," Tony Robson at BMO Capital Markets said. "A significant downturn may mean Chinalco is approved, while a modest recovery or signs of recovery may see it voted down."