Aluminum Corporation of China or Chinalco (ACH), Chalco's parent company, has signed an agreement with the iron ore mining giant Rio Tinto Ltd. (RTP) to develop the Simandou iron-ore project in Guinea (Africa). Rio Tinto owns 95% of the Simandou project, with the remaining 5% owned by the International Finance Corporation ("IFC"), the financing arm of the World Bank. The mine will commence production in 2013 and will reach an annual capacity of 70 tons once fully commissioned, with an estimated iron ore grade of 66%?67% and total reserve of over 2.25 billion tons.

Under the deal, Chinalco will acquire a 47% interest for $1.35 billion in the joint venture. The amount received from Chinalco will be used for the project's development after which Rio Tinto will own 50.35% and Chinalco's share would go down to 44.65%. The Guinean government holds an option to buy up to 20% of the project, which would proportionally reduce the effective interests of Rio Tinto, Chinalco and IFC. Rio Tinto will be in charge of the venture's operations and Chinalco will participate in its management.

Simandou is the world's biggest undeveloped iron ore deposit, with 2.25 billion tons of ore. The project, forecast to cost $6 billion, is scheduled to produce 70 million tons of ore in 2013, its first projected operational year, with the capacity to increase production later.

Aluminum Corporation expects to benefit from the long-term growth of the Chinese economy as well as through capacity expansion, acquisitions and joint ventures. Chinalco is intensifying its own mine production as well as diversifying its production base by expanding overseas. Chinalco believes the joint venture with Rio Tinto paves way for Chinalco to become a diversified metals mining company in the long run.

With the global economy back on track to recovery, foreign firms will find joint ventures more feasible and acceptable. However, a slowing economy marked by overcapacity due to a weakening demand from the automotive and construction sectors is hurting the company's profitability. However, we remain Neutral on Aluminum Corporation.