HONG KONG/MELBOURNE - MINING group Rio Tinto has agreed to a US$19.5 billion (S$29.4 billion) cash injection from China's state-owned Chinalco in a deal aimed at cutting Rio's debts, a source familiar with the deal said on Thursday.

The deal involves Chinalco spending US$12.3 billion on stakes of 15-50 per cent in assets owned by Rio, the source said. It would also buy US$7.2 billion of bonds convertible into shares of Rio, the world's largest maker of aluminium, second-largest iron ore miner and a top-five copper producer.

Under the deal, Chinalco would double its stake in Rio to 18 percent from the 9 per cent it bought with US aluminium giant Alcoa a year ago.

The plan is likely to face close scrutiny from the Australian government, which last year said Chinalco would need prior approval if it wanted to raise its stake in Rio above 15 per cent of the group's London shares. Australian investors and media were already criticising the reported deal on Thursday.

Rio's former suitor, bigger rival BHP Billiton, may also enter the fray, with counter bids for some of the asset stakes Chinalco is set to pick up, the Times Newspaper said on its website on Thursday.

An agreement with Chinalco had been widely expected after Rio's chairman-designate, Jim Leng, quit the mining group two days ago because of objections to a tie-up with the state-run Chinese aluminium maker, which is already Rio's top shareholder.

Rio is expected to confirm the deal when it announces its annual results at 0600 GMT (2pm Singapore time).

Rio, the world's third-biggest diversified mining group by market value, said last week it had held talks with Chinalco about selling it convertible notes and stakes in some assets.

Australian Treasurer Wayne Swan said any deal would be scrutinised by Australia's Foreign Investment Review Board in the 'normal way'. Swan has a veto over foreign investment.

The government has said it would look closely at investments by foreign state-owned entities to ensure they were not pursuing a political or strategic agenda.

A Chinalco deal may ease investor concerns over Rio's US$39 billion debt load and a US$9 billion debt payment due in October.

Early criticism
But at least two fund managers and analysts in Australia said some shareholders might not be pleased and Rio could run into problems when the plan went to a shareholder vote.

Criticism has focused on Rio allowing a big state-owned customer, which has an incentive to keep prices down, so much influence over the group and direct stakes in prized assets.

'This approach is a bit of a worry. They seem to have favoured one shareholder over all the others at this point in time,' said ABN AMRO analyst Warren Edney.

Ken West, of Perennial Growth, added: 'It seems to me to be a blurry sort of connection that long term may not be healthy for the market place.' Rio's London shares climbed 3.5 per cent to 1,969 pence on Wednesday, outperforming a 0.7 per cent increase in the UK mining index, after jumping 6.2 per cent in Australia.

Rio shares were put on a trading halt in Australia ahead of the announcement expected after the market closes on Thursday.

Rio stock has fallen by more than a fifth since BHP walked away from a US$66 billion hostile bid for Rio on Nov 25, while the broader market is down just 4 per cent. BHP shares have meanwhile gained 22 per cent, trading up 1.3 per cent on Thursday.

Chinalco will invest the US$12.3 billion in three strategic partnerships with Rio across its copper, aluminium and iron ore divisions, the Financial Times said on Thursday.

This would involve Chinalco taking minority stakes in a total of nine assets around the world - at Weipa, Yarwun, Boyne & Gladstone Power, Escondida, KUC, Grasberg, la Granja and Hamersley Iron.

Rio owns 30 per cent of Escondida, the world's biggest copper mine. BHP, which owns 57 per cent of the Chilean mine, has said it would be interested in Rio's Escondida stake if it was for sale.

The Times report said BHP was expected to approach the Rio board to make a counter-offer for some of the mining stakes, and if the board were to reject BHP's approach, it would be prepared to go directly to shareholders. BHP declined to comment.

Chinalco would receive one seat on Rio's board and have the right to appoint another at a later date. Chinalco last year told the Australian government it would not seek a board seat. -- THOMSON REUTERS