Rio Tinto shares regained the $60 mark yesterday after it revealed two new deals, one of which is a major project, the other a sign that its reputation in China remains intact.
Of the two deals the $4.5 billion Mongolian copper project called Oyu Tolgoi, is the more important in the longer term.
But the first major investment in China since the Stern Hu arrest and detention carries with it far greater symbolism and is a very important step for the group.
It shows that the Hu arrest, plus the rejection of Chinalco, hasn’t ruined its future in China.
In a statement yesterday the company said its subsidiary, Alcan Engineered & Automotive Solutions, had signed an agreement with Changchun Engley Automobile Parts.
Rio shares had bounced anyway off the back of the surge in gold and other commodities. They finished up 5.2%, or $3.02 at $60.75.
Rio shares were also helped by an upgrade to 2010 iron ore price estimates by Goldman Sachs JBWere.
EAS and Engley will develop and produce crash management systems, instrument panel beams and other goods for the fast-growing Chinese car market.
It is understood the new agreement was signed on September 25.
A Rio Tinto spokesman said it would be the first substantial investment in China by the miner since the Stern Hu affair.
In July, Rio Tinto’s relationship with the Chinese government worsened after it rejected the investment from Chinalco and four employees, including Australian national Stern Hu, were arrested and accused of stealing state secrets.
The four men were involved in iron ore price negotiations and remain in custody awaiting trial, although charges have been significantly reduced in importance.
Rio Tinto is the majority owner of the new venture, Alcan Engley Automotive Structures Co Ltd, with the first products expected to be shipped later this year.
"Alcan’s advanced aluminium lightweight solutions play a significant role in today’s fuel-efficient cars all over the world including China," EAS president Wolfgang Schmitz said in a statement.
"China is posting double digit growth in car sales and will continue to offer exceptional growth opportunities for our engineered products in the coming years," he said.
The company will be based in the north-eastern city of Changchun, with a second manufacturing plant in Kunshan, close to Shanghai.
Rio Tinto acquired EAS as part of its $US38.1 billion purchase of Alcan in 2007.
This deal is symbolic, the big earner is the Oyu Tolgog project which saw Mongolia sign with Rio Tinto and Canada’s Ivanhoe Mines on Tuesday to develop the $US4 billion ($A4.56 billion) gold and copper mine.
The agreement has been uncertain for months after it was changed after opponents complained it shortchanged Mongolia.
Parliament had to repeal a windfall profits tax in August before London-based Rio and Ivanhoe Mines would agree to go ahead.
Mongolia will own 34% of the mine and receive a $US250 million ($A285 million) advance payment against royalties and taxes under the agreement signed by its ministers for finance, mining and the environment and executives of Rio and Ivanhoe.
Negotiations over Oyu Tolgoi started eight years ago in 2001 but have been fitful. The prospect is located in the Gobi desert, near the Chinese border.
Under the latest version, the government can buy shares to raise its stake to 50% after 30 years once the miners recoup their initial investment.
Production is expected to commence in 2013, with a five year ramp up to full expected production of 450,000 tonnes of copper per year and 330,000 ounces of gold.
Bret Clayton, chief executive of Rio Tinto’s Copper and Diamonds group, said that Oyu Tolgoi is consistent with Rio Tinto’s strategy of investing in large, long life, low cost ore bodies.
“While the size and grade of the existing Oyu Tolgoi ore reserves and mineral resources are already world class, we are also excited by significant exploration upside that still remains,” he said. “We plan to be a partner here in Mongolia for decades to come,” he said in a statement.
"Rio Tinto initially made a US$303 million investment in a 9.95% shareholding in Ivanhoe Mines in October 2006 under the terms of a Placement Agreement, and has the obligation to invest US$388 million for a further 9.95% holding at the conclusion of an unconditional investment agreement with the Mongolian government (Tranche 2).
"Rio Tinto and Ivanhoe have recently agreed to a short term, month by month extension of the October 27 deadline for completing Tranche 2.
"Under its current agreements with Ivanhoe Mines Ltd, Rio Tinto has the right to acquire up to 43.1 per cent of Ivanhoe’s shares under fixed price options, with a right to further increase that interest to 46.65 per cent through on-market purchases."
