Rio seals $13bn ore deal with Chinalco

Less than a year after one of the business world's most extraordinary bust-ups, in which Rio walked away from a proposed $US19.5 billion tie-up with state-owned Chinalco in favour of an iron ore joint venture with BHP Billiton, the pair have reunited in a move that will also help mend strained relations between Australia and China.

Rio and Chinalco said they had signed a non-binding memorandum of understanding to establish a joint venture to develop and operate the high-grade Simandou project in Guinea, expected to be one of the world's largest iron ore mines.

Under the deal, revealed earlier this week by BusinessDay, Chinalco will acquire a 47 per cent interest in the new joint venture for $US1.35 billion on an earn-in basis through sole funding of ongoing development work over the next two to three years.

At that point, Rio's share will be reduced from the present 95 per cent to 50.35 per cent, Chinalco will take 44.65 per cent and the International Finance Corporation, the financing arm of the World Bank, will hold the remaining 5 per cent. The project will require significantly more funding before it becomes operational.

Rio chief executive Tom Albanese, who has been working to repair the relationship with Rio's largest shareholder, is on the way to Beijing, where he is due to address the China Development Forum this weekend.

His visit to China will coincide with the start of court proceedings against Australian Stern Hu and three of his Rio colleagues.

Prime Minister Kevin Rudd this week warned China that "the world will be watching" how the matter is dealt with after revelations that Australian officials would be excluded from parts of the trial.

Despite the awkward timing of the deal, Mr Albanese heaped praise on its new joint-venture partner and talked up the potential of Simandou, an area some say could become the world's third-largest mining province.

"We have long believed that Rio Tinto and Chinalco could work together on major projects for mutual benefit," he said. "Chinalco is an excellent partner for us in Simandou. Chinalco brings its own skills and capabilities in major projects and access to the infrastructure expertise or other Chinese organisations. We believe the Simandou project is a large-scale, long-life asset and is the single best undeveloped source of high-grade iron ore.

"By working with Chinalco and the IFC, we expect to realise great economic and social benefits for Guinea, and great value for our shareholders."

Rio has spent $US600 million on exploration and evaluation work on Simandou, which has a 2.25 billion-tonne iron ore resource and is expected to produce 70 million tonnes of iron ore a year when fully operational. Rio said the Simandou project already employed 1000 people in Guinea, a figure that would grow to "tens of thousands of jobs during construction and more than 4000 full-time jobs during the operational phase".

But Rio was unable to say whether its original date of 2013 for first production would eventuate. The time line was thrown into doubt two years ago when BSG Resources was handed Rio's rights to the northern half of the Simandou tenement. The Guinean government has not renounced the claim, but it has not been accepted by Rio either.

A Rio spokesman said that having Chinalco on board could "speed up first production" but that approvals would first have to be sought from the Chinese and Guinean governments.

"The good news is that all of that 2.25-billion-tonne resource is in the southern bit, which the claim doesn't refer to," he said.

Rio and Chinalco will now work on drawing up a binding agreement, which is expected within three months.

Goldman Sachs JBWere analysts said the development of Simandou would do little for Rio's net present value.

Rio shares fell 80? to $76.19.