Rio Tinto has scrapped its £12.1 billion deal with Chinese state-backed aluminium company Chinalco, sending the mining giant's shares soaring.

Rio gained more than 14 per cent as said it would instead form a tie-up with its former suitor BHP Billiton and launch a £9.4 billion rights issue to reduce its debt burden and boost the balance sheet.

The controversial £12.1 billion deal with Chinalco would have been one of China's biggest overseas investments.

It was dropped because of improved market conditions, Rio said. The firm will pay Chinalco a £120 million break fee.

Rio said the new partnership with BHP included all the firms' Western Australian iron ore assets and would be equally owned by both companies.

The deal is thought to be worth £6.2 billion in savings.

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

"We believe it represents great value for shareholders and will create a business combination able to serve growing international markets with unparalleled efficiency."

Analysts welcomed the move. Jonathan Jackson, head of equities at Killik said: "For Rio Tinto overall this is positive news and should remove any lingering concerns over the group's financial viability and leaves it well placed to benefit from a continued upswing in the commodity cycle."

He said it would also improve the group's relationship with its institutional shareholders, some of whom had complained about the size of the Chinalco deal.

Rio said the outlook for 2009 remains uncertain although it expects to benefit from cost cutting moves and currency movements.

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