Shares in Rio Tinto Ltd
The stock was down 11.4 percent at A$57.84 at 12:11 a.m. EST, off an earlier low of A$57.11, but far outpacing a 3 percent loss in the wider market <.AXJO>, and recording its biggest one-day percentage fall since December 4.
Rio's London-listed shares had closed 10.6 percent lower on Wednesday amid the mounting rights issue speculation.
Several factors prompted the sell-off in Rio this week, after it had nearly doubled in price to a six-month high since early March, including doubts about the global economic recovery and Rio's own cautious outlook at a conference in Spain this week, which weighed down on all mining stocks.
Investors also pointed to uncertainty over Australia's Foreign Investment Review Board decision, due in about four weeks, on the deal with state-owned Chinalco, and continuing speculation about a rights issue.
Major UK-based investors in Rio Tinto have reiterated demands it drop the proposed asset and equity sales to Chinalco and pursue a new capital raising or a sale of assets to BHP Billiton instead.
In Australia, fund managers said they would not be surprised if Rio Tinto was looking at alternatives to the existing deal, following Rio's share price run-up since December.
I would hope that they are looking at whether they can enhance it, said Neil Boyd-Clark, a portfolio manager at Fortis Investment Partners, which owns Rio Tinto shares.
Under the deal, Chinalco would get minority stakes in some of Rio Tinto's iron ore, copper and aluminum assets and $7.2 billion in convertible notes that would double Chinalco's equity stake in Rio.
The Chinalco deal looked like a cheap deal for the Chinese, said Chris Kimber, a client adviser, with Bell Potter Securities in Sydney, adding that the market was bracing for a rights offer.
That is why they have come off because once the share price got up to those levels, the Chinalco deal doesn't look like a good deal any more. So, it wouldn't surprise me to see (the deal) called off.
One of the reasons Rio has faced anger from investors is that the deal appeared to ride roughshod over so-called pre-emption rights which are supposed to give investors first refusal in any capital raising.
The deal has also drawn the ire of some Australian politicians, concerned about foreign presence in the economically vital mining industry.
When Chinalco struck the deal in February Rio Tinto had little room for maneuver as there was no other way to raise cash to pay down half its $38 billion in debt, taken on when it bought Alcan at the peak of the commodities boom.
Now that has changed.
The reality is there's capital available for them. They've got options, said Don Williams, chief investment officer at Platypus Asset Management.
(Reporting by James Regan, Denny Thomas and Sonali Paul)