China Investment Corp, a $300 billion wealth fund, may be weighing up a bid for state-owned Chinalco's stake in mining giant Rio Tinto in what would be its boldest move yet into natural resources.
If CIC were to proceed, the fund would take a chunk of one of the world's top diversified miners, delivering on Beijing's goal to better use its huge foreign exchange reserves.
For its part, Aluminum Corp of China (Chinalco) would exit a company with which it had sought, but failed, to forge a larger partnership.
And Rio? It would win the allegiance of a highly prized cornerstone investor and end a relationship with a company that wanted something more than a passive role.
Chinalco being there is kind of a double-edged sword because they were trying to block the BHP (Billiton) thing early on, and they wanted a seat on the board, said James Wilson, analyst at DJ Carmichael in Australia.
Perhaps CIC might want to take advantage of an increasing, very upward momentum iron ore market at the moment, he added. I think it would be quite positive. You want a cornerstone investor who sort of sits there.
Any deal between CIC and Chinalco would keep with CIC's recent resources-focused strategy. It made a number of stake acquisitions last year, including a 14.5 percent stake in commodities firm Noble Group for $850 million, and a 17.2 percent stake in Teck Resources for $1.5 billion.
What's more, China would retain exposure to Rio, but from a less contentious position.
Chinalco, as an operating company, aims to influence strategy and operations -- making a simple stake investment relatively meaningless to the firm, said an Asia-based resources banker.
But CIC is a pure investment vehicle: It doesn't seek operating control over assets.
You can outline a relatively watertight theoretical case for the transfer of that stake, said Michael McCormack, an executive director at Z-Ben Advisors in Shanghai.
CIC has very carefully spent the last two years cultivating this specific approach to companies that this kind of deal would attempt to exploit, he said. It's hands off, it's totally passive, it takes no role in management.
Some investment banks approached CIC late last year about the possibility of taking over Chinalco's Rio stake, two sources told Reuters. One source close to CIC noted Deutsche Bank was likely to advise the fund on any deal involving Chinalco. The sources asked not to be named due to the issue's sensitivity.
Market speculation that Chinalco may sell its Rio stake first surfaced in late-November, knocking Rio's London-listed shares down nearly 3 percent.
This is a new rumour, Chinalco Vice President Lu Youqing told Reuters last month, declining further comment.
In September, Deutsche Bank, along with China International Capital Corp, advised CIC on its $1.9 billion loan deal with Indonesian coal miner PT Bumi Resources Tbk.
Deutsche and Rio declined to comment. CIC did not return phone calls seeking comment.
Any sale by Chinalco at this moment would come at a loss for the aluminium giant. But since Chinalco and CIC are both backed by the state, the stake still has the same owners, analysts say.
Chinalco's stake in Rio has sunk in value in recent years as Rio's stock was hammered by concerns over its massive debt burden and as commodity prices plunged during the financial crisis.
The Chinese group teamed up with Alcoa to buy 12 percent of Rio's London shares, or 9 percent of Rio's total share registry, for $14 billion in February 2008, paying an initial 60 pounds a share in a raid on the London-listed stock -- that stock was last trading at 35.82 pounds on Thursday.
That move was seen then as a route to blocking BHP Billiton's takeover bid for Rio, which Beijing feared would give the mining titan too much clout in setting the prices of raw materials China needed to fuel its industrial growth.
Last year, Chinalco took up its full rights entitlement in a big Rio rights issue, spending another $1.5 billion.
That came after it launched a $19.5 billion tie-up bid for Rio, which Rio ultimately rejected. Things then soured, with Beijing later arresting four Rio employees in Shanghai, including an Australian citizen, for allegedly stealing state secrets.
Today, if you look at the relationship between Chinalco and Rio, probably everybody will tell you they're like a broken couple, said a Beijing-based source familiar with CIC's investment strategy.
Still, worries linger that CIC -- which itself is often seen as an aggressive arm of the Chinese state -- may cause more controversy than Chinalco. Any deal may pose a new challenge for Australian Prime Minister Kevin Rudd to control festering concerns about China's growing clout and influence.
I'm not completely convinced in my own mind if CIC has got a long enough track record to convince the most hot-headed, anti-China legislators that it's not going to be viewed as a stalking horse, said McCormack. (Additional reporting by Polly Yam, Editing by Ian Geoghegan)