Global miners Rio Tinto and BHP Billiton said on Friday they will combine their major Australian iron ore operations, scuppering a $19.5 billion bid by China's Chinalco to secure a stake in Rio and long-term access to its key ore supplies.

BHP and Rio, the world's second and third largest iron ore miners, have agreed to combine the operations into a 50-50 joint venture, the companies said in a joint statement, generating savings of at least $10 billion.

BHP, which dropped a bid to buy Rio last year, will pay Rio Tinto $5.8 billion to take its equity interest in the venture to 50 percent, but it stressed that the agreement was non-binding at this stage.

Rio said it was raising $15.2 billion in a deeply discounted rights issue to further cut its hefty debt pile.

It's significant. It's something that was always a possibility and now it's been realized, said Jamie Spiteri, senior dealer at Shaw Stockbroking.

A significant component of BHP and Rio's success going forward is to ensure that they reestablish good relations with the Chinese despite the fact the Chinalco deal with Rio has fallen over.

Chinalco said it planned to make a statement on Friday.

BHP shares in Australia climbed more than 9 percent to A$38.43.

Rio Tinto shares jumped 10 percent to A$73.59, versus Rio's rights issue price at A$28.29 a share


Rio Tinto said the iron ore joint venture would result in savings of more than $10 billion from the combined operations.

My initial reaction is that it will be overwhelmingly positive for both companies because of the cost savings, the synergies, said Michael Bentley, resources portfolio manager at Northward Capital.

The prospects for Chinalco were less clear.

Under a deal agreed in February, Chinalco would pay $12.3 billion for stakes in debt-saddled Rio's key iron ore, copper and aluminum assets and $7.2 billion for convertible notes that would double its equity stake in Rio to 18 percent.

Rio originally lined up the deal to help pay off half its $38 billion in debt and had hoped to complete the deal by early in the third quarter.

It would have been the biggest overseas investment by a Chinese company.

The deal ran into opposition from Rio shareholders, who complained it favored Chinalco over other shareholders, and from some who are worried that China, Rio's biggest customer, will gain influence over pricing of key commodities like iron ore.

BHP launched a bid to buy Rio back in 2007 through a three-for-one share swap that Rio rejected, saying it vastly undervaluing the firm and its prospects.

(Additional reporting by Sydney and Melbourne newsrooms; Writing by Lincoln Feast; Editing by)