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Chalco Invests $1.35 Billion in Rio's Simandou Iron Ore Project in Guinea

Aluminum Corp. of China Ltd., the nation’s biggest producer of the metal, agreed to pay $1.35 billion for a stake in Rio Tinto Group’s Simandou iron ore project in Guinea, making its first investment in the commodity.

Chalco, as the Beijing-based company is known, will acquire a 44.65 percent stake by funding development over the next two to three years, the companies said in a joint statement. Today’s agreement follows an initial accord on the project in March with Chinalco, Chalco’s state-owned parent.

Rio is working to repair relations with China, its biggest customer, after scrapping a $19.5 billion investment from Chinalco last year. Chalco, facing a 12 percent drop in aluminum prices, will benefit from tapping what London-based Rio has said is the world’s top undeveloped iron ore deposit. The project could be worth about $9.5 billion, according to UBS AG.

“Chalco delayed a share sale this year and the stock performed badly,” Owen Liang, a Shenzhen-based analyst at Guotai Junan Securities Co., said by phone. “To raise funds, the company needs to convince investors of profit growth. The Simandou project will contribute substantially to profit after it starts.”

Rio Tinto, whose largest shareholder is Chinalco, rose 0.7 percent to A$71.50 at the 4:10 p.m. close on the Australian stock exchange. The London-traded stock advanced 0.8 percent to 3,413.5 pence by 11:37 a.m. local time.

Biggest Overseas Investment

Rio’s interest in Simandou could be worth $2.89 per share, UBS analysts led by London-based Olivia Ker said in a report today. That’s not currently included in their valuation, they said. Shares of Chalco, down 22 percent this year in Hong Kong trading, were suspended pending the announcement and are expected to resume trading tomorrow.

Guinea, which has sought to take a 20 percent stake in part of the project, doesn’t recognize the agreement between Rio and the Chinese aluminum company, Mahmoud Thiam, the country’s mines minister, said in an interview in Conakry, the capital, today. While approval isn’t a condition for the venture, Rio continues to consult with the government, a Rio spokesman said today.

Chalco will work with other Chinese companies to jointly develop the project including China Railway Construction Corp. and China Communications Construction Group, it said in a statement at today’s signing ceremony. Chalco officials couldn’t be reached for further details.

Abandoned Custom

The deal will be Chalco’s biggest overseas investment after it last month pulled a plan to develop an A$3 billion ($2.7 billion) bauxite project in Australia as market conditions deteriorated. Bauxite is a raw material used in aluminum. In February, the company agreed to jointly develop and operate a $1 billion smelter in Malaysia with GIIG Holdings Sdn.

“This project can also efficiently balance China’s need for security of supply on the global iron ore market,” Xiong Weiping, chairman of Chalco and Chinalco, said in the statement.

“The two sides will regard cooperation on the Simandou project to be the foundation for further pushing forward the cooperation of these two companies in other resource projects.”

Imports of iron ore by China, the biggest buyer, jumped 42 percent last year to a record 628 million metric tons. Vale SA, Rio Tinto and BHP Billiton Ltd., the biggest suppliers of the steelmaking ingredient, this year abandoned a 40-year custom of setting annual prices and raised rates twice as demand gained.

Delayed Share Sale

“The project will contribute roughly 4.5 billion yuan ($664 million) of profit a year, based on current iron ore prices,” Guotai’s Liang said. “It will also reduce the pricing power of the three biggest miners.”

Rio will retain a 50.35 percent stake after the investment by Chalco, and a 5 percent stake is held by the International Finance Corp. The Guinean government has an option to buy as much as 20 percent of the project, and has “recently expressed a willingness to exercise that option,” the statement said.

That will proportionally reduce the holdings of Rio, Chalco and the IFC in the project, according to the statement.

Chalco, which posted a loss of 4.6 billion yuan in 2009, was forced to delay a share sale earlier this year after an equity market decline. The company is increasing capital expenditure by 36 percent to 14.6 billion yuan, Xiong said on March 30. The company returned to profit last quarter.

Aluminum futures in Shanghai have declined 12 percent this year, and closed today at 15,385 yuan a ton. The average production cost of Chinese aluminum smelters is 15,300 yuan a ton, according to CRU International Ltd. Prices have dropped below output costs, Chalco President Luo Jianchuan said in June.

Model for China

Rio’s Albanese said in March that the Simandou venture could be a model for other Chinese outbound investment. Companies in China, the biggest metal consumer, spent more than $30 billion buying mines and oil deposits globally last year.

Mining will start within five years, Albanese said in today’s statement. Rio had already spent $650 million on the project, Chairman Jan Du Plessis said at a conference in Beijing today.

The agreement helps to repair relations between Rio and Chinalco that frayed after last year’s failed investment and the arrest of four Rio employees in China. In March, the four Rio workers were sentenced to jail for between 7 years and 14 years for taking bribes and for infringement of commercial secrets.

To contact the Bloomberg News staff on this story: Xiao Yu in Beijing at yxiao@bloomberg.net; Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Jesse Riseborough in London at jriseborough@bloomberg.net

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