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Rio Seeks Improved China Relations, Explores Chinalco Ventures

Friday, Aug 21, 2009
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Aug. 21 (Bloomberg) -- Rio Tinto Group said it’s seeking a better relationship with China, the mining company’s largest customer, and is in talks with Aluminum Corp. of China after four executives were arrested in a spying row. Chief Executive Officer Tom Albanese said he’s “disappointed” Rio didn’t complete a proposed investment by state-owned Aluminum Corp., also known as Chinalco, in June. He’s held “early stage” talks with the company and Chinese officials about cooperation and possible joint investments, he said yesterday in an interview on Bloomberg Radio. “Those relationships are very important. Certainly from a Chinalco perspective, in the long term I think there are things we can do together,” Albanese said. “We have a number of challenges in China at the moment.” Albanese has grappled with borrowings that ballooned after Rio’s $38.1 billion purchase of Canadian aluminum producer Alcan Inc. in 2007. He rejected Chinalco’s proposed $19.5 billion deal in June, instead selling shares and agreeing to a joint venture with rival BHP Billiton Ltd. to help pay debt. A month later, four Rio iron ore executives were detained in Shanghai. They face charges of bribery and stealing commercial secrets from China’s steel industry. China accounted for 27 percent of Rio’s sales in the first half, Rio said yesterday in its first-half earnings statement. China ranked third behind North America and Europe a year earlier. So-called underlying earnings excluding some one-time items fell 54 percent to $2.6 billion, missing the $2.73 billion median estimate of seven analysts surveyed by Bloomberg News. Chinese Charges Rio advanced 23 pence, or 1 percent, to close at 2,334.5 pence on the London Stock Exchange yesterday. The Bloomberg Europe Metals & Mining Index of 15 companies rose 2.7 percent as metals prices gained. Rio has climbed 90 percent this year. Rio is “pleased” the charges against Stern Hu, an Australian and head of its iron ore business in China, and the three other executives weren’t as serious as first thought and that the four have legal teams in place, Albanese said. “Things have moved in the last few weeks, and they’ve moved in a positive direction,” Albanese told reporters in London. The company is still seeking a price settlement for annual iron-ore supply contracts with Chinese steel mills. Negotiations have stalled as the China Iron & Steel Association demands a cut from last year’s record price that’s steeper than the 33 percent agreed on by Japanese and Korean customers. Iron Ore Talks Rio is still shipping iron ore to China on long-term contracts with so-called provisional pricing terms based on the 33 percent cut, Albanese said on a conference call. He said he hoped Rio could agree on a price benchmark this year. It sold 50 percent of its iron ore on the so-called spot market in the first quarter and most of that went to China, he told reporters. “If we can’t come to an agreement, the customer plays as much a part in that as the producer,” Albanese said. Rio’s first-half net income tumbled 65 percent to $2.5 billion on lower commodity prices. The iron ore unit, its biggest earner, had a 33 percent decline in underlying earnings to $1.9 billion in the first half. The aluminum unit swung to a $689 million loss from a profit of $1 billion. Earnings from its copper and diamond unit plunged 72 percent to $472 million. The company isn’t paying a dividend for the first half. It may pay a final dividend for 2009 subject to “satisfactory trading results, progress on divestments and prevailing market conditions,” Chairman Jan du Plessis said in the statement. The total cash dividend for 2010 will be at least equal to the $1.75 billion paid in 2008, he said. Rio raised $3.7 billion this year selling assets, cut 16,000 jobs in the first half compared with a target of 14,000, and is on schedule to meet commitments to reduce full-year spending, Albanese said. To contact the reporters on this story: Brett Foley in London at bfoley8@bloomberg.net;

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