Rio should strike while the iron is hot: Alexander Smith

-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --

By Alexander Smith

LONDON (Reuters) - Rio Tinto may not have to ditch Chinalco after all. Instead, the Chinese state-owned metals company looks as if it may pull the plug on its $19.5 billion stake purchase instead, rightly ending months of uncertainty.

Rio could have made life a lot easier for itself, and its shareholders, if it had at the beginning offered them the chance to participate in any fund raising to fill the huge debt hole it dug itself with the purchase of Alcan.

Special deals with "strategic partners" are never popular with shareholders. In the last few days, since Sheikh Al Nahyan flipped the big stake he took last autumn in Barclays, they have become toxic.

A terse statement from the mining group simply says it is "pursuing a range of options." But after months of defending the Chinalco deal, Rio does not even mention its erstwhile partner.

Rio needs to raise cash quickly. It has an $8.9 billion debt due for repayment in October, with a further $10 billion due next year. Investors have shown their appetite for jumbo rights issues such as HSBC's huge offering and investment bankers are confident a mining group of Rio's size could raise substantially more than $10 billion in a capital hike if required.

Rio should strike while the iron is hot and raise as much cash as it needs, and a bit more to see it through. But first its management needs to admit to shareholders it was wrong to stuff the Chinalco deal down their throats in the first place.

Only two weeks ago, Rio's new chairman Jan Du Plessis was out telling shareholders to vote for the Chinese deal. He now has not only angry investors to placate but a major customer in Chinalco who will be less than happy with the outcome.