Chalco Shares Rise on Guinea Iron Ore Stake Purchase (Update1)

BEIJING, July 30 -- Aluminum Corp. of China Ltd., the nation's biggest producer of the metal, rose the most in more than four months in Shanghai trading after agreeing to buy a stake in Rio Tinto Group's Simandou iron ore project in Guinea.

Chalco, as the Beijing-based company is known, rose as much as 10 percent in Shanghai, the biggest increase since March 19, and gained 5.5 percent to 10.77 yuan at 10:13 a.m. after resuming trading today.

Chalco, facing a 12 percent drop in aluminum prices, will benefit from tapping what London-based Rio has said is the world's top undeveloped iron ore deposit. The Chinese company yesterday agreed to pay $1.35 billion for a 44.65 percent stake in the project, which UBS AG estimated to be worth $9.5 billion, by funding development over the next two to three years.

"Chalco's profit has dropped sharply and last year it had a loss," said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co. "The Simandou iron ore assets may give investors a positive profit expectation, even though it will be some years later."

The deal will be Chalco's biggest overseas investment after it last month pulled a plan to develop an A$3 billion ($2.7 billion) bauxite project in Australia as market conditions deteriorated. In February, Chalco agreed to jointly develop and operate a $1 billion smelter in Malaysia with GIIG Holdings Sdn.

The company may have to sell equity to raise funds for the Simandou venture, Credit Suisse Group AG said in a note yesterday. The project could raise long-term profit by 75 percent, analysts led by Trina Chen said.

Two Partners

Chalco will work with other Chinese companies, including China Railway Construction Corp. and China Communications Construction Group, on the project, it said in a statement at yesterday's signing ceremony.

Shares of the company in Hong Kong rose 3.3 percent to HK$6.93 at 10:15 a.m. local time. Rio fell 0.6 percent to A$71.07 at 12:36 p.m. on the Australian stock exchange.

Rio will retain a 50.35 percent stake after the investment by Chalco, and a 5 percent stake is held by the International Finance Corp. The Guinean government has an option to buy as much as 20 percent, and has "recently expressed a willingness to exercise that option," yesterday's statement said.

Guinea doesn't recognize the agreement between Rio and Chalco, Mahmoud Thiam, the country's mines minister, said yesterday in Conakry, the capital. While approval isn't a condition for the venture, Rio continues to consult with the government, Rio said yesterday. Chalco spokeswoman Shen Hui declined to comment.

Rio controlled the entire Simandou concession until Guinea ordered it to hand over blocks 1 and 2 in December 2008 to closely held BSG Resources Ltd. In April this year, Brazil's Vale SA agreed to pay $2.5 billion for deposits in Guinea, including those blocks. Last month, Guinea told Rio it planned to take a 20 percent stake in blocks 3 and 4 at the project.