Chinalco says its US$14-billion purchase of a 12-percent stake in Anglo-Australian mining giant Rio Tinto is a strategic investment, and it may sell the holding in future to make a profit.

The market has seen Chinalco's buy-in partnership with Alcoa Inc as a blocking move while BHP Billiton, the world's largest mining company, makes a play to buy Rio Tinto.

Chinalco President Xiao Yaqing said in Sydney yesterday that the company could sell the stake as part of BHP bid for Rio if the investment makes money. This echoes some analysts' view that Chinalco's buy should be a safe play as BHP may sweeten its offer, from which Chinalco could take a profit.

Melbourne-based BHP now has to table a formal offer for Rio before a Wednesday deadline under UK takeover rules, or it has to wait six months before trying again. Rio has rejected BHP's initial offer of three of its shares for every Rio share, in a deal worth about US$130 billion, saying it undervalues the company.

Xiao reaffirmed that Chinalco won't raise its stake and said the deal is part of its strategy to become a diversified mining company. According to news wires, Xiao declined comment on speculation the deal is aimed at blocking BHP's proposal.

Should Chinalco's move derail BHP's bid, the impact on the Chinese metal industry would be positive, said Frederic Gits, senior director at Fitch Ratings. The possible merger of two of its most important raw material suppliers could be seen as a threat in an industry dominated by so few players, he said.

Chinalco's deal, announced late on Friday, helped lifted its listed unit Chalco and other Chinese steel makers, such as Baosteel, by their 10 percent daily cap in Shanghai trading yesterday.

"However, from Chalco's viewpoint, the picture is less clear, as it would benefit from the improved access to raw materials. But the increased financial burden on its parent Chinalco might also result in some strain on its capital structure," Gits said.

BHP's bid has also been opposed by mills across Asia and Europe on fears that a buyout would create a powerful cartel controlling iron ore prices.

However, BHP Chief Executive Officer Marius Kloppers insists that a combination would lead to higher efficiency and lower costs. Led by Shanghai-based Baosteel, China is the world's largest buyer of iron ore, with contract prices soaring over the past few years.

(Shanghai Daily February 5, 2008)