UPDATE 2-Chalco, Rio Tinto Formalise Guinea Iron Ore Venture

BEIJING/HONG KONG, July 30 -- Aluminum Corp of China Ltd (Chalco) (2600.HK: Quote) has agreed to invest $1.35 billion in a Guinea joint venture that partner Rio Tinto (RIO.AX: Quote) claims is the world's largest undeveloped iron ore deposit.

The agreement to develop the Simandou project follows a non-binding deal signed in March by Chalco's (601600.SS: Quote) parent, Chinalco, and is the Chinese group's first non-aluminium investment overseas.

Beijing has recently given both Chalco and Chinalco the green light to add more assets to their core aluminium businesses, allowing them to push into iron ore and secure more natural resources that are helping fuel the world's third-largest economy.

Analysts said the move would help Chalco diversify beyond a volatile aluminium market, which has seen prices swing between $3,300 and $1,300 a tonne in two years.

"It's probably a good thing for investor sentiment," said UBS analyst Patrick Dai. "Investors will probably hope that Chalco will become equally diversified in the future, which will then reduce its reliance on aluminium alone."

The Simandou venture is expected to begin production within five years, according to a statement on Thursday from Rio, in which Chinalco holds a stake of around 9 percent.

Chalco will pay Rio, which holds the rights to develop the project, $1.35 billion over two years. The Chinese group would have 47 percent of the venture's interest, with Rio holding the remaining 53 percent.

The joint venture will hold a combined 95 percent of the project, with International Finance Corp (IFK.P: Quote) owning the rest.

GUINEA OPTION

However, the Guinea government said it plans to exercise an option to own 20 percent of the Simandou project, which would reduce the joint venture and IFC's stakes proportionally.

Rio, which has already invested more than $650 million in the project, has been in dispute with Guinea over some blocks the government took from Rio and gave to BSG Resources, controlled by Israeli billionaire diamond trader Beny Steinmetz.

BSG sealed a deal in April with Vale (VALE5.SA: Quote)(VALE.N: Quote) to develop those blocks.

Chalco shares were suspended in both Shanghai and Hong Kong on Wednesday ahead of the announcement.

The Hong Kong-listed shares last traded at HK$6.71 and are down 22 percent this year, amid a broader decline that has seen aluminium prices MAL3 fall steadily since April. Its Shanghai shares last traded at 10.21 yuan, down 29 percent year to date.

The deal also signals a revival of Rio Tinto's relations with China, its biggest customer, after four of its staff were jailed in Shanghai for bribery this year and after the company scrapped a tie-up last year with Chinalco, its top shareholder.

The new beginning was on display as Chalco toasted the signing in Beijing on Thursday with 150 VIPs and champagne. A banner outside the nearby Sinosteel offices welcomed Rio's iron ore chief executive Sam Walsh to the city.

Rio reckons the Simandou deposit holds 2.25 billion tonnes of ore, a key ingredient in steel making. The project is forecast to cost $6 billion.