Feb. 6 (Bloomberg) -- Rio Tinto Group, the world's third- largest mining company, rejected a sweetened $147 billion offer from BHP Billiton Ltd. because it ``significantly'' undervalues the iron-ore and copper producer.

BHP's bid doesn't ``recognize the underlying value'' of London-based Rio's assets and prospects, Rio Chairman Paul Skinner said today in a statement. ``Our plans are unchanged, and will remain so unless a proposal is made that fully reflects the value of Rio.''

BHP Chief Executive Officer Marius Kloppers raised the bid by 13 percent five days after Aluminum Corp. of China, the nation's biggest aluminum company, bought a stake in Rio to block the takeover. The combination of BHP and Rio would create the world's biggest producer of copper and vie with Brazil's Cia. Vale do Rio Doce as the largest supplier of iron ore.

``It's still obviously well short of where Rio places its value,'' Charles Kernot, an analyst at Seymour Pierce Ltd. in London, said by telephone. ``BHP were right to increase their bid today to show they are serious, and I suspect there is still something in their back pocket to raise it a little bit more.''

BHP's American depositary receipts, each representing two ordinary shares, fell $3.35, or 4.8 percent, to $66.13 as of 3:36 p.m. in New York. Rio's ADRs, each representing four ordinary shares, fell $11.69, or 2.8 percent, to $409.81.

Rival Bid

BHP, based in Melbourne, increased its offer to 3.4 shares for every one of Rio's. The bid values Rio at 5,168 pence a share, based on BHP's closing share price in London. State-owned Aluminum Corp. of China, also known as Chinalco, and Alcoa Inc. paid 6,000 pence a share for 9 percent of Rio last week.

Chinalco may be preparing a bid, the London-based Times newspaper said today, without citing the source of the information. Lu Youqing, vice president of Chinalco, declined to comment on the report when contacted by telephone. Chinalco and Alcoa said in a statement today they will ``closely monitor further developments.''

BHP's bid values Rio at 13.6 times earnings before interest and tax, compared with the 13.7 times that Rio paid for Alcan Inc. last year. BHP, which made an initial approach in November, had until today to formalize its offer or walk away for six months after a U.K. Takeover Panel ruling.

`Makes Sense'

``Rio should be having a discussion,'' Don Williams, who helps manage $1.3 billion at Platypus Asset Management, said by phone from Sydney today before Rio said it rejected the bid. He sold half of his Rio holding on Feb. 4 after the Chinalco and Alcoa purchase. ``This ratio makes sense.''

Goldman Sachs Group Inc., Citigroup Inc. and five more banks agreed to provide the world's biggest-ever loan at $55 billion after the bid. Goldman and Gresham Partners LLC are BHP's principal advisers. BHP also hired Citigroup, HSBC Holdings Plc, Lazard & Co. Ltd., Merrill Lynch & Co. Inc. and UBS AG.

Rio hired Morgan Stanley, Macquarie Group Ltd., Credit Suisse Group and NM Rothschild & Sons Ltd. as advisers.

Chinalco may try to block BHP because China, the world's largest importer of iron ore and consumer of copper and aluminum, needs raw materials to feed an economy that grew 11.4 percent in 2007, the fastest in 13 years. The nation's biggest commodity companies have said they're concerned the combination would concentrate supplies and may control prices.

``This is our first and only offer,'' Kloppers, 45, said today in a teleconference. ``We absolutely want full control of this company.''

Kloppers has pledged to generate $3.7 billion in cost savings and revenue gains by buying Rio. BHP has generated a total return of 245 percent since it acquired Billiton Plc in June 2001 and listed its shares in London. Rio has returned 176 percent over the same period.

Kloppers said BHP will seek to talk to Chinalco, Alcoa and all other Rio investors.

To contact the reporter on this story: Brett Foley in London at bfoley8@bloomberg.net

Last Updated: February 6, 2008 15:43 EST