Global miner Rio Tinto defended itself on Monday against shareholder criticism of its proposed $19.5 billion tie-up with China's state-owned Chinalco, its rejection of a takeover bid by BHP Billiton and its costly 2007 purchase of Alcan.

At the group's annual meeting in Sydney, following one in London last week, outgoing chairman Paul Skinner said BHP Billiton's 3.4-for-one share offer never recognized Rio Tinto's value and the group admitted it had paid too much for Alcan.

We now live in a world in a different state, he told angry shareholders. The Chinalco proposition is the best value proposition available to Rio Tinto today.

Rio's shares slid 4 percent on Monday, but that followed a 54 percent gain over the past three months, nearly 8 times better than the broader market <.AXJO> as investors were encouraged that the Chinalco deal would help Rio cut half its $38 billion in debt.

It's been a tremendous performer in the past few months. People are just taking some profit ahead of the AGM today, since there's likely to be a lot of negative news articles about the Chinalco deal, said fund manager Tim Schroeders of Pengana Capital.

Prolonged price talks over iron ore, Rio's most profitable product, also weighed on its share price.

There was some press this morning that the iron ore negotiations may get stretched out longer than anticipated and therefore that would be providing a level of uncertainty, which is probably not going to work favorably for the producer in the short term, said Jamie Spiteri, senior dealer at Shaw Stockbroking.

Rio and BHP are locked in talks with Asian steelmakers to settle iron ore prices for April 2009-March 2010. Steel mills want a quick settlement with a steep cut in annual prices, but the miners are holding out amid signs of an economic recovery.

Rio Tinto shares last traded down 4.4 percent at A$56.50, while BHP's shares were down 2.4 percent at A$32.62, helping to drag the broader market down 1.1 percent.

RIO STANDS BY CHINALCO

Major investors have complained that the Chinalco deal favors one shareholder over others, but they are starting to recognize it is the best option for slashing debt.

The deal would give China's top aluminum maker $12.3 billion worth of stakes in Rio's iron ore, copper and aluminum assets and $7.2 billion worth of convertible debt that could double its stake in the group to 18 percent.

People are becoming educated about the prices (Chinalco is paying) and the repositioning of the company with less debt and growth options, said Schroeders.

There was also media speculation that BHP had held informal talks with Rio over the weekend, but fund managers said this was not behind the fall in Rio's share price.

BHP refused to comment on Monday on the speculation cited by broadcaster CNBC that it and Rio had held informal talks.

They are always talking, but I wouldn't call the talks 'formal', an investment banker with direct knowledge of the Chinalco-Rio deal told Reuters.

The speculation has been swirling for several weeks, sparked by questions on whether the Chinalco deal would go ahead in the face of political concerns about Australian resource assets falling into the hands of the Chinese state.

Pengana's Schroeders put a low probability on BHP doing anything with Rio in the next 12-18 months, saying conditions had not changed enough since it pulled its bid last November blaming weak commodity markets, Rio's debt and its inability to sell off assets.

Any talks now would have to focus on specific assets, or possibly a rights offer, as under UK takeover regulations BHP cannot revive a full takeover bid until November.

But Rio is focused on the Chinalco deal.

I think potentially we are on the threshold of an exciting new partnership, Skinner said.

(Additional reporting by Sonali Paul in MELBOURNE, Bruce Hextall and Mette Fraende in Editing by Mark Bendeich & Ian Geoghegan)

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