Well, one thing's for certain: You can't call Aluminum Corporation of China (NYSE: ACH), a.k.a. Chalco, a piker. Late last week, Chalco, in partnership with Alcoa (NYSE: AA), threw a monkey wrench into BHP Billiton's (NYSE: BHP) unsolicited offer for Rio Tinto (NYSE: RTP) by paying a shade more than $14 billion to take a 9% stake in dual-listed Rio.
Let me be plain: Even though it paid a 21% premium to the closing price of Rio's shares on Thursday, I view this move as a win-win situation for Chalco, which stands to benefit no matter whether BHP succeeds in its bid.
Let's take a look at two scenarios, just to make sure I'm not out of my Foolish mind.
Scenario No 1: Assume BHP succeeds in courting Rio
First, Chalco's stake, though not large enough to be a spoiler on its own, does complicate matters for BHP, in that other investors will look at Chalco's purchase price as a minimum starting point with regard to a future offer. At the very least, Chalco will most likely recognize a pretty penny on its investment in the short term. In fact, earlier today, the president of Chalco's state-owned parent, Chinalco, said, "If we made money and our investment creates value and if [Alcoa] agrees, we might sell."
I don't know about you, but those are at lot of "ifs" ... especially since it's known that the Chinese government is keen to avoid a Rio-BHP combination.
A second and more likely outcome in the event that BHP swallows Rio: The stake enables Chalco to be at the negotiating table with BHP, and its cooperation could entail its expressing interest in some of BHP's and Rio's aluminum properties. Chalco is currently the world's second largest producer of alumina and the fourth biggest player in aluminum.
Scenario No. 2: Rio rebuffs BHP
First, as recently as this past November, Chalco President Luo Jianchuan was quoted as saying that the possible tie-up of BHP and Rio "makes us worried" in terms of their prospective pricing power. It's hard to believe that with Chalco holding a large stake in the standalone Rio, the company won't be able to negotiate advantageous prices for itself.
Second, Friday's statement from the company pointedly didn't mention ruling out a future bid for the whole of Rio. Although doing so would prove difficult in terms of the political temperature in Australia and complicated in operational/management issues, it would catapult Chalco right to the top of the world's commodity markets in one fell swoop.
Given the possible upside potential from Chinalco's bold move and a forward 2008 price-to-earnings ratio of just 14, I think investors should consider adding a chunk of Chalco to their portfolios.
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