Rio Tinto today risked the future of its relationship with China, its biggest customer, after dumping a $19.5 billion (£12 billion) deal with Chinalco, the state-owned metals group, and signing a joint venture with BHP Billiton, its bitter rival.

The Times exclusively revealed yesterday that Rio had ripped up an agreement to sell a stake in the group to Chinalco after angry shareholders complained that they had not been given an opportunity to participate in a rights issue.

There was also concern that the deal would have given Chinalco, Rio’s largest shareholder, with a 9 per cent stake, too much influence over the company.

Xiong Weiping, the president of Chinalco, said today that the group was "very disappointed" with the outcome.

He said: “Chinalco will continue to explore opportunities to advance its strategic objectives and in the meantime will monitor developments at Rio as the company’s largest current single shareholder.”

Jan du Plessis, the chairman of Rio, said that he abandoned the deal after rising commodity prices made the original terms less attractive.

Rio has now signed an agreement with BHP, which it fought off in a bitter, $135 billion hostile bid last year.

BHP has been lobbying against the Chinalco alliance for some time. It will pay Rio $5.8 billion to equalise their ownership of the joint venture, taking BHP's stake to 50 per cent from 45 per cent.

Rio will ask existing shareholders for $15.2 billion to reduce the $39 billion debt it racked up after buying Alcan, the Canadian aluminium company.

Investors welcomed the joint venture between Rio and BHP. Shares in the two companies rose by 10.1 per cent in early trading, to £16.04 and £29.95 respectively.

Although Rio is Australia’s biggest iron ore exporter and has room for expansion at its ports, BHP’s untapped iron ore resources are believed to be better situated.

The joint venture will be headed by Sam Walsh, the chief executive of Rio Tinto Iron Ore.

The companies estimate that the venture will cut at least $10 billion from the combined annual costs of their operations.

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

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

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

It includes a mutual break fee of $275.5 million.

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