SYDNEY/BEIJING - China's state-owned Chinalco is taking up its full entitlement to Rio Tinto's $15.2 billion share issue, media reports said on Tuesday, with trade in the rights suggesting Chinalco is far from severing its ties with the Anglo-Australian miner.
Agricultural Bank of China, one of Beijing's big four state banks, will offer part of the funds Chinalco needs to buy Rio Tinto's new shares, the influential Caijing Magazine cited an unnamed source from the bank as saying.
London-listed rights RIOn.L to Rio's share issue surged 11.6 percent on Monday, chiming with British news reports that Chinalco had decided to take up its entitlement instead of looking to sell some of its rights in the market.
Both the Financial Times and Daily Telegraph reported that Chinalco was set to take up all its rights, at a cost of around 880 million pounds ($1.46 billion), to keep its stake in Rio Tinto's London-listed stock at about 12 percent.
Chinalco's relations with Rio soured early this month when the indebted miner called off a bigger equity partnership that would have seen the Chinese group invest another $19.5 billion into dual-listed Rio Tinto.
Instead, Rio ditched the deal in favor of the rights issue and an iron ore joint venture with rival BHP Billiton, raising howls of protest from China where state media characterized Rio as a dishonorable woman.
Chinalco has decided to participate in Rio Tinto's share issue. AgBank and China Development Bank will offer it the loans, the banking source told Caijing.
Lu Youqing, vice president of Chinalco, also told Caijing his company had made up its mind on whether to buy Rio's rights, but declined to elaborate as this was market sensitive information.
Chinalco's 12 percent of Rio's London shares give it about 9 percent of the overall group. It bought the stake in February last year, near the peak of the market, at 60 pounds ($99.69) per share in a raid on the London-listed stock.
The rights, which have traded ahead of the issue closing on Wednesday, jumped to 742 pence in London on Monday from Friday's close of 665 pence, with 9.97 million traded.
If there was ever any expectation of an overhang in the rights, that seems to have been removed, said a Sydney-based resources analyst. He did not want to be identified because he was not authorized to talk to the media.
Rio and Chinalco would not comment on whether the Chinese firm would take up the issue.
Citigroup resources analyst Clarke Wilkins, in a research note, said his firm expected Chinalco to take up its rights, but there was no guarantee it would maintain its Rio investment in the longer term, potentially creating an overhang in the stock.
Rio closed up 4.5 percent at 20.87 pounds on Monday. In Australia on Tuesday, the stock was down 0.2 percent at 0740 GMT (3:40 a.m. EDT).
Rio is offering existing shareholders the right to buy 21 new shares for every 40 held at 14 pounds each in London and A$28.29 each in Australia. Trading in the Australian rights finished last Wednesday at A$21.10 ($17.10) per right.
By taking up its rights, Chinalco would be able to lower the average cost of its holding.
Some analysts have even suggested Chinalco may have bought extra rights on-market as the issue gave it the chance to increase its stake, at a discount, to a maximum 14.9 percent allowed under Australian foreign investment rules.
(Reporting by Bruce Hextall in SYDNEY and Eadie Chen in BEIJING; editing by Mark Bendeich & Ian Geoghegan)