Rio Tinto and Chinalco JV to Explore China
On Wednesday, Rio Tinto (NYSE:RIO) and Chinalco, China’s state owned mining major, entered into a joint venture to explore mainland China for mineral deposits. The joint venture is subject to Chinese regulatory approvals and on approval the venture will carry out operations under the name Chinalco Rio Tinto Exploration Co. Ltd. (CRTX) where Chinalco and Rio Tinto will hold 51% and 49% respectively. [1] Rio Tinto has operations across six continents but primarily focuses its operations in Australia and Canada, and it competes against other global mining giants such as BHP Billiton (NYSE:BHP) and Vale (NYSE:VALE) as well as smaller mining companies like Cliffs Natural Resources (NYSE: CLF) and Freeport McMoran (NYSE:FCX).
Our $97 base price estimate for Rio Tinto’s stock is roughly a 40% premium to the market price.
Rio Tinto and Chinalco have had a mixed relationship in the past. In 2009, Rio Tinto walked away from a $19.5 billion bid from Chinalco to increase its stake from 9% to 18% after the opposition from Australian regulatory board that limits foreign holding in a company to 15%. This was viewed as partly a politically motivated move by the Australian government.
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In 2010, the companies signed a non-binding Memorandum of Understanding in December to establish an exploration joint venture in China signaling that relations had improved.
The JV’s immediate focus will be copper exploration while other commodities like copper and potash will be considered at a later stage. We believe that the joint venture will lend a significant upside to Rio Tinto’s shipments from the copper division.
According to Chinalco President Xiong Weipin:
Access to natural resources is a critical component to many of the world’s leading economies. Drawing on the respective strengths of both companies, this exploration joint venture could potentially create commodity supplies to benefit the global economy.
Rio Tinto’s CEO Tom Albanese said:
The formalisation of our exploration JV is an important milestone in the expanding relationship between Rio Tinto and China. Given that mainland China is highly prospective, the JV has the potential to create valuable opportunities for both partners.
The companies will look to leverage their strengths by giving Chinalco global exposure in order to market their products better and Rio Tinto an opportunity to explore selected potential mining areas in China.
See our full analysis for Rio Tinto.
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