Chinalco May Accept Lower Stake in Rio, Herald Says

May 21 (Bloomberg) -- Aluminum Corp. of China, the nation’s biggest aluminum producer, may take a smaller stake in Rio Tinto Group to win approval for its $19.5 billion investment, the Sydney Morning Herald said, citing people close to the company. Chinalco is open to letting Rio sell convertible bonds to other shareholders, reducing its planned stake to 15 percent, the Herald said. That may allow the state-owned entity to avoid breaching foreign ownership rules and placate investors concerned at not being offered stock on the same terms. Rio has agreed to sell $7.2 billion of convertible debt and $12.3 billion worth of stakes in its mines to Chinalco and use the funds to pay debt. The mooted changes don’t remove concerns that an arm of China’s communist government will gain too much control over Rio and its Australian assets, said Senator Barnaby Joyce, who is leading a campaign against the deal. “There is one thing they want and that is a meaningful interest in the company,” said Ric Ronge, who helps manage the equivalent of $775 million, including Rio shares, at Pengana Capital Ltd. in Melbourne. “Everything will be done to ensure that the deal does go through.” Rio rose 2.9 percent in Sydney trading to A$66.64 at the 4:10 p.m. Sydney time close after gaining 4.3 percent in London yesterday. Under the existing proposal, Chinalco’s stake in Rio Tinto may double to 18 percent should it convert all the debt. Chinalco Vice President Lu Youqing couldn’t be immediately reached for comment. Rio’s Melbourne-based spokeswoman Amanda Buckley declined to comment. “We still have the same problem that the resource in situ, in the ground, is owned by another nation’s government,” Senator Joyce today told Bloomberg Television. Shareholder Opposition Legal & General Group Plc, the third-largest shareholder in Rio’s London stock, in February called for an alternative proposal that could be considered by all investors. The Association of British Insurers, representing 400 institutional investors, said it was “deeply concerned” by the deal. The Chinese company is prepared to replace marketing provisions in the agreement with an undertaking that it won’t play a role in selling or setting prices for Rio’s production, the Herald reported. Chinalco is also willing to abandon its claim to 30 percent of Rio’s iron-ore output, the newspaper said. It will support conditions from Australia’s Foreign Investment Review Board that would “re-Australianize” Rio, the Herald said. Those conditions may include raising the number of Australian directors to three, requiring certain executives to reside in the country, and specifying the number of board meetings to be held there each year, the paper said. Australia’s Foreign Investment Review Board may ask Chinalco to resubmit its application after the June 15 deadline for further deliberation, delaying Rio’s plan to put the proposal to an investor vote, the Herald said. Rio announced the Chinalco accord in February to help slash $38.9 billion of debt.