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. (
) where Chinalco and Rio Tinto will hold 51% and 49% respectively.
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 (
) and Vale (NYSE:VALE) as well as smaller mining companies like
Cliffs Natural Resources (
Our $97 base price estimate for Rio Tinto's
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.
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
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
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
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.