Miner Rio Tinto remains committed to a planned $19.5 billion tie-up with Chinese metals firm Chinalco, it said, responding to talk that the deal may be revised to let more shareholders take part in a rights issue.
The latest endorsement of Chinalco, already Rio's largest shareholder, also comes amid speculation the Australian government could demand revisions, or kill the deal under foreign investment guidelines because Chinalco is state-owned.
Rio Tinto shares closed 7.4 percent higher at A$61.88 in Sydney Friday, recouping some of a previous heavy slide on market talk it might renegotiate the most controversial part of the deal -- a $7.2 billion issue of convertible bonds to Chinalco.
London shares, which have surged 77 percent this year, gained 2.78 percent to 2,666 pence by 4:21 a.m., in line with the UK mining index.
Speculation had focused on whether Rio would tweak the bonds issue to make it available to all Rio shareholders, not just Chinalco, or on whether the deal could be scrapped and another strategic investor brought in, perhaps rival miner BHP Billiton
The company remains committed to delivering this strategic partnership, Rio Tinto said in response to a query from the Australian stock market over the movements in its share price.
The deal as it stands would double Chinalco's Rio stake to 19 percent.
POSSIBLE REVISED DEAL
The Australian Financial Review newspaper said Friday Chinalco would consider changing the terms of the convertible bonds, but was adamant the other major element of the tie-up -- $12.3 billion in direct investments in key Rio mining assets -- should remain as agreed in February.
Citing no sources, the business daily said Rio Tinto's director of strategy, Doug Ritchie, was believed to have visited Chinalco officials last week to discuss investors' opposition to the deal and possibly to revise the terms of the bond issue.
Chinalco President Wang Wenfu was believed to be pragmatic over the price of the notes, the newspaper added.
Analyst Michael Rawlinson at Liberum Capital in London said Australia's Foreign Investment Review Board (FIRB) might provide the opening for a rejigged deal.
If Chinalco can renegotiate, how to do so without losing all important face? One renegotiation driver could be the FIRB, a note said.
Waiting until the FIRB has put in some conditions on a deal could allow the two sides to re-cast a deal that addresses both shareholder and FIRB issues.
The Review said the FIRB was expected to seek changes to the Chinalco deal, including limiting the size of its equity stake to 14.99 percent and asking Chinalco to forgo one of two Rio board seats it is seeking.
The FIRB is expected to make its recommendations to Treasurer Wayne Swan by June 14. Swan has the final decision.
In a report Thursday, investment bank UBS said BHP Billiton might offer to help underwrite a Rio Tinto rights issue and propose an iron ore joint venture.
A BHP spokesman declined to comment. BHP shares rose 3 percent to A$33.29 Friday.
Anyone who's underweight in Rio will obviously want a massive dilutive rights issue, because it actually helps them, said a fund manager in Australia who owns shares in Rio and BHP and who did not want to be named.
Perhaps then, you can get into Rio at a much lower price. But if you're overweight Rio, then having a highly dilutive rights issue is just nuts, the manager said.
Rio Tinto struck the Chinalco deal in a bid to pay down $38 billion in debt it took on in 2007 to buy Alcan at the peak of the commodities boom.
Rio Tinto is also selling assets to pay down debt and it gave an update on the asset-sale program Friday, saying it would record a gain of $900 million on the sale of undeveloped projects for its first half-year to June 30.
Also Friday, Rio Tinto said the U.S. Committee on Foreign Investment had cleared the Chinalco deal.
But two major hurdles remain to the deal: Australian foreign investment approval and separate approval from Rio shareholders, neither of which is assured.
(Additional reporting by Mark Bendeich in Sydney and Eric Onstad in London; Editing by Ian Geoghegan, Sharon Lindores)