IN a move away from the commodity that gave the company its name, Aluminum Corp of China has agreed to pay Rio Tinto Ltd US$1.35 billion for a stake in an iron ore mine in the West African country of Guinea.

Under the agreement, Chalco, as the company is known, will establish a joint venture with Rio Tinto to develop and operate the Simandou project.

By funding development over the next two to three years, Chalco, the listed subsidiary of Chinalco, will acquire a 44.65 percent stake from Rio Tinto, which holds 50.35 percent. The remaining 5 percent will be owned by the financing arm of the World Bank, the International Finance Corp.

Chalco, China's biggest maker of the lightweight metal, has decided to transform itself into a more diversified metals mining company after being pinched by soaring costs and fluctuations in aluminium and alumina prices.

"This transaction is consistent with the company's development strategy to seek development opportunities in the mining industry and to seek high-quality overseas mineral projects," said Luo Jianchuan, president of Chalco.

The company lost 4.6 billion yuan (US$676 million) in 2009 after revenues fell for a second consecutive year. Analysts estimated that profitability will worsen in the second half because the country has scraped preferential power tariffs for aluminum producers.

"The golden period for its major aluminum business has gone as the measures to curb energy-intensive industries will remain. The (iron-ore) move is a good try for it to seek new growth point," said Heng Kun, an analyst at Essence Securities Co.

The project is believed to be a long-life asset and the single best undeveloped source of high-grade iron ore.

The project has an estimated 2.25 billion metric tons of resources, with ultimate reserves of 5 billion metric tons. It can produce 70 million metric tons annually at the initial phase. Satisfying demand in the China market will be a high priority, the companies said.

However, some industry watchers warned about possible risks due to Guinea's poor infrastructure and unstable politics.

The binding agreement follows the signing of a memorandum of understanding between Rio and Chalco's parent announced on March 19. Mining operations are expected to start within five years.

This is the first time the companies have teamed up since Rio scrapped Chinalco's US$19.5 billion investment in equity and assets and four Rio employees were arrested in Shanghai last year. It's seen as a sign the two parties are repairing their relationship.