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Rio walks away from deal with Chinalco -

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Rio walks away from deal with Chinalco

The World Today - Friday, 5 June , 2009 12:16:00

Reporter: Peter Ryan

PETER CAVE: It was going to be China's biggest ever foreign investment and a lifeline for the
mining giant Rio Tinto but today the deal is dead after Rio confirmed it was walking away.

China's government owned miner Chinalco had wanted to invest more than $19-billion in its rival
Rio, which is overloaded with debt.

The collapse of the deal has been welcomed by the National's Senate leader Barnaby Joyce who has
says Australia's "wealth in the ground" will now be protected from China.

But in a sudden twist Rio today announced it had formed a joint venture with its former suitor BHP
Billiton to combine their Australian iron ore operations.

Here's our business editor Peter Ryan.

PETER RYAN: This time last year, Rio Tinto shares were trading at around $142 each.

By December they'd plunged to just under $30 and Rio's board was facing a $40-billion debt bill
from its ill-considered acquisition of the Canadian aluminium producer Alcan.

Then BHP Billiton scrapped its takeover bid for Rio and the miner was suddenly without a suitor in
a sea of debt.

DAVID QUO: Initially, Rio Tinto needed Chinalco. They needed Chinalco's money.

PETER RYAN: David Kuo is a London commodities analyst who's been tracking the deal. He says
Chinalco's bid for an 18 per cent stake in Rio had been aggressively pursued and until recently
both companies had been lobbying Australia's Foreign Investment Review Board for approval.

But Rio's share price has more than doubled this year and commodity prices are starting to show
signs of life; good reasons for the Rio Tinto board to have second thoughts.

DAVID KUO: It's almost turning around and saying, well, you wanted an 18 per cent stake in our
business - you were willing to give us $19.5-billion for it, but because our share price is now
much higher, you are going to get a much smaller stake.

And I think that Chinalco is saying, no, we still want this 18 per cent stake for the same price.
And of course Rio Tinto is probably going to walk away.

PETER RYAN: Rio shares were placed in a trading halt this morning, after earlier noting market
speculation that the deal was dead.

The National's Senate leader Barnaby Joyce, who opposed the deal on the grounds of national
interest, says it's the right result.

BARNABY JOYCE: It is great for the Australian people that this deal falls over and we do not have
the complications of the Communist People's Republic of China's Government owning the wealth of
Australia, in the ground in Australia.

PETER RYAN: But Senator Joyce says Treasurer Wayne Swan should have vetoed the proposal from the
start.

BARNABY JOYCE: It is great that the deal's fallen over. What I do feel very annoyed about is we
really had to rely on a stuff-up in the management expertise of Rio for the deal to fall over,
rather than the decision of the Australian Parliament.

There was gyrations and manipulations, and he was trying to duck and weave to avoid having to say
the word no, which he knew was the right thing to say.

PETER RYAN: The market is split on the merits of the now deceased Rio Chinalco deal.

But market watcher Tom Murphy told Bloomberg he's relieved.

TOM MURPHY: You can only imagine Australia's terms of trade if the end user of iron ore were the
owner of the iron ore mines. That is a very serious thing.

This is not a yellow peril issue. This is not an issue to do with China taking our resources. It's
China as the end user taking our resources, and it's a very, very serious national interest issue.

PETER RYAN: Late this morning after hours of speculation, Rio Tinto's chief executive Tom Albanese
used an investor webcast to confirm the deal with Chinalco was off.

TOM ALBANESE: Our transaction with Chinalco was the right decision in February. Financial markets
have since improved, significantly creating more options.

Changing circumstances, feedback from shareholders and regulators resulted in the need to revise
the Chinalco agreement and this was recognised by both sides.

PETER RYAN: It's a costly decision with a break fee of $US195-million to be paid to Chinalco.

But in an unexpected twist, Rio and its former suitor BHP Billiton have announced a non-binding
deal that in many ways overshadows the Chinalco collapse.

BHP will pay Rio nearly $6-billion as part of a 50-50 joint venture covering all of the two
companies' West Australian iron ore ventures.

Tom Albanese told analysts it's a win-win.

TOM ALBANESE: We believe the net present value of these unique production and development synergies
will be in excess of $US10-billion.

PETER RYAN: As with the Chinalco deal, there's a break fee of $US275-million if either side pulls
out.

The joint venture will be subject to ACCC scrutiny but it puts BHP Billiton back in the game to
acquire more Rio Tinto assets in a recovering market.

The announcements also put a rocket under BHP and Rio shares, up 8 and 9 per cent respectively in
morning trade.

PETER CAVE: Our business editor Peter Ryan.