Feb. 4 (Bloomberg) -- BHP Billiton Ltd., the world's largest mining company, must raise its $127 billion bid for Rio Tinto Group to at least match the price Aluminum Corp. of China paid for its stake, said investors including Herschel Asset Management Ltd.

Chinalco, as the state-owned company is known, and Alcoa Inc. paid 6,000 pence ($117.91) a share for a 9 percent stake in London-based Rio Tinto. That's 23 percent more than the value of BHP's three-for-one share offer, based on Feb. 1's closing prices.

``That is now the opening price for a discussion,'' said Saxon Nicholls, who manages the equivalent of $840 million at Herschel in Melbourne, including shares of both BHP and Rio. Nicholls' Herschel Australian Equity Fund rose 19 percent last year compared with a 12 percent gain in the benchmark S&P/ASX 200 Index. ``The Chinese and Alcoa have forced the issue.''

BHP Chief Executive Officer Marius Kloppers has until Feb. 6 to make a formal bid or walk away for at least six months, the U.K. Takeovers Panel has ruled. He wants to create a company to supply a third of the world's traded iron ore and be the biggest maker of aluminum and energy coal. His counterpart at Chinalco, Xiao Yaqing, may be trying to stop him because of concern the combined group will have too much pricing power.

Rio rose by as much as A$6.08, or 4.8 percent, to A$133.39 and traded at A$132.20 at 10:19 a.m. Sydney time on the Australian Stock Exchange. Rio's London stock gained 13 percent on Feb. 1 to 5,600 pence. BHP rose by as much as A$1.75, or 4.5 percent, to A$40.30 after a 9.8 percent gain on the London exchange.

Lift Offer

BHP spokeswoman Samantha Evans and Rio Tinto spokeswoman Amanda Buckley both declined to comment.

BHP needs to lift its offer by between 33 percent and 48 percent to win support, Michael Rawlinson, an analyst at Liberum Capital Ltd., said in a Jan. 31 report. Rio Tinto's advisers say BHP can afford to increase its takeover offer to as much as five shares for one, The Australian newspaper reported last week, citing a Macquarie Group Ltd. analysis.

``There are other investors who see the value of Rio Tinto,'' said Herschel's Nicholls. ``If BHP are to acquire Rio, it's appropriate for them to make their move now.''

Chinalco and Alcoa's purchase was made through Shining Prospect Pte., a Singapore-based investment vehicle owned by Chinalco, the companies said in a Feb. 1 statement. Alcoa contributed $1.2 billion in funding to Shining Prospect to buy 12 percent of Rio's London-listed shares. That stake is equal to about 9 percent of the combined Rio Tinto Group, listed in the U.K. and Australia.

`Dead in Water'

``Three for one is obviously dead in the water and our view all along is that four for one would be closer to the mark,'' said Gavin Wendt, an analyst at Fat Prophets in Sydney, who rates BHP and Rio's Australian shares ``hold.''

With Chinalco and Alcoa paying cash for their stake while BHP's offer was all stock, Nicholls and Wendt expect any new offer may appeal to investors with a combination of both.

Rio Tinto became the world's biggest aluminum producer last year, leapfrogging New York-based Alcoa, when its $38.1 billion takeover offer for Canada's Alcan Inc. trumped Alcoa's hostile bid.

``While it clearly raises the price BHP have to pay for Rio Tinto, it also gives the Chinese and Alcoa a seat at the table on what will happen to Rio's aluminum assets,'' said Fat Prophets' Wendt.

Chinalco and Alcoa said they don't currently plan to make a takeover bid for Rio Tinto.

To contact the reporter on this story: Robert Fenner in Melbourne rfenner@bloomberg.netRebecca Keenan in Melbourne at rkeenan5@bloomberg.net

Last Updated: February 3, 2008 18:34 EST