Mining giants Rio Tinto and BHP Billiton have agreed a joint venture covering their iron ore operations in Western Australia in a deal expected to save the firms at least $US10 billion.

The deal will see BHP Billiton pay Rio Tinto $US5.8 billion to equalise their stakes in the joint venture and take BHP’s stake to 50 per cent from 45 per cent.

"The joint venture will establish an unrivalled iron ore business with world class assets and infrastructure," Rio chairman Jan du Plessis said in a statement.

BHP Billiton chairman Don Argus said: “The combination of these two asset portfolios will unlock the scale benefits inherent in this world class resource basin.”

The surprise announcement of the deal between the two bitter rivals came hours after the collapse of a $US19.5 billion deal between Rio Tinto and the Chinese resources giant Chinalco.

The two sides had failed to renegotiate the terms of their deal which looked increasingly generous to Chinalco as commodity prices and Rio’s share price rose.

Rio Tinto announced today it had cancelled the Chinalco deal and would launch a $15.2 billion dollar rights issue to alow the company to solve its debt problems.

"The transaction announced and recommended by the boards will no longer be pursued,” Rio said in a statement, referring to the Chinalco deal.

The collapse of the Chinalco venture, which would have been the biggest deal in Australian corporate history, has spared Kevin Rudd’s government from difficult foreign policy decisions. However the venture to combine elements of the two mining giants’ iron ore operations in the Pilbara region of Western Australia will face tough regulatory hurdles.

BHP Billiton, which last year walked away from a $135 billion bid for Rio, has been actively lobbying against the Chinalco alliance for some time.

It has also been seeking a tie-up of the mining companies’ iron ore operations. While Rio Tinto is Australia’s biggest iron ore exporter and has much better expansion options at its ports, BHP Billiton’s untapped iron ore resources are believed to be better situated.

Rio struck its deal with Chinalco in February in an effort to reduce its $39 billion debt burden, built up after the acquisition of Alcan, the Canadian aluminium company. The company would have raised $7.2 billion by issuing convertible bonds to Chinalco and a further $12.3 billion from selling stakes in mines. The bonds would have increased the Chinese company’s shareholding in Rio from 9 per cent to 18 per cent when they converted in seven years’ time, and given it minority stakes in key mining projects.

However the deal had become a heated political issue in Australia, with concerns centred on Chinalco’s status as an entity wholly owned by the Chinse government, raising fears that strategic assets could be controlled by the Chinese.

A decision from the Australian Government was expected by June 15 and Rio and Chinalco were under pressure to revise the terms of the deal to make it politically acceptable in Australia.

Under the terms of the new deal, Rio and BHP Billiton will continue to sell Pilbara iron ore independently to their clients.

It includes a mutual break fee of $US275.5 million.

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