China Stake in Rio Tinto Underlines the Attractions of Miners

UK mining stocks spiked higher last week on news that state-owned Aluminum Corp of China (Chinalco) has teamed up with Alcoa of the US to buy a 12% stake in Rio Tinto.

According to Sacha Sadan, manager of Gartmore’s £312m UK Growth Fund, this news serves to reinforce the considerable attractions of mining stocks.

“China’s purchase of a US$14bn stake in Rio Tinto validates the view that there is long term value in the mining sector and emphasises the strength of Rio’s cash flow,” says Sacha.

Rio rejected a 3-for-1 all-share offer from BHP Billiton in early November and analysts have long speculated that China might seek to exert an influence as the largest customer of both companies. BHP raised its offer to 3.4 shares per Rio Tinto share on Wednesday.

“Rio Tinto is a long-term strategic asset coveted by both BHP Billiton and China. With Xstrata now looking as if it may be involved in future M& A and with no signs of a slowdown in the global demand for industrial commodities, the search is on for mines that can produce for a generation. Cost pressures are high and rising, so it’s considerably cheaper to buy mines than it is to develop new ones.”