Roadblocks for Rio Tinto

The high-stakes deal between struggling Anglo-Australian mining giant Rio Tinto and China's state-owned Chinalco looks set to go down to the wire, with the Australian government set to say yea or nay sometime within the next two weeks.

Rio Tinto lined up the deal with Chinalco back in February, looking for a way to pay down half of its A$38 billion in debt as debt markets remained frozen and commodity prices collapsed. Under the terms agreed, Chinalco would take minority stakes in some Rio mining assets as well as buying convertible notes that could double its equity stake to 18 percent.

Business journalist Tim Treadgold is based in Perth, close to the Western Australia mining heartland. He told Asia Sentinel that "this is not a good deal and I think it will get unwound. It was truck at a low point in the markets, and to price a deal of this magnitude at such a low point in the markets was very unwise."

Rio Tinto has been struggling since a A$S38.1 billion takeover of Alcan in 2007 weighed the mining giant down with debt. Rival Aussie mining company BHP Billiton came in with a whopping A$135 billion takeover bid, which Rio Tinto snubbed.

Rio Tinto Chairman Jan du Plessis has just finished a shareholder schmoozing session in Australia, presumably trying to get all parties on board for the deal. For its part, Chinalco is said to be aghast at what it saw as a tepid reaction by Rio Tinto to the shareholder mini-revolt, with the Chinese fearing that the terms of the deal would be reworked considerably by a Rio Tinto over-eager to get shareholders onside.

Rio's mining chief Sam Walsh shared a stage with the Chinese Ambassador to Australia at a conference in Canberra last Tuesday week. He told the audience:

"We have certainly seen economic conditions improve since the deal was announced in February, but importantly for us we need to take into account in our deliberations what our shareholders see as the key issues," he added.

Market conditions have changed since the deal was first nailed down, and Rio Tinto's other shareholders are apparently willing and able to pony up the cash needed, despite being snubbed in the first place.

Ambassador Zhang Junsai did not raise any Chinese hackles to the notion of a revised deal, instead seeking to allay Australian concerns. He told the same conference that China wasn't trying to control Australia's energy and minerals sector, adding that Chinalco might be state owned but it wasn't state run and its primary aim, like most commercial enterprises, was making money.

Separately, Beijing sought to play hardball in recent days over iron ore prices, believing that as the world's biggest ore importer, it could seek a cut to 2007 price levels. This would take around A$20 billion off Australian export revenues during a year when, at current predictions, the Australian economy is set to contract by .5 percent, according to Treasury predictions.

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Chinalco is prepared to drop marketing agreements and lower its potential stake in Rio to 15 percent from the proposed 18 percent it will be delivered under the A$US7.2 billion convertible bond issue. But it does not want to give up its A$US12.3 billion purchase of stakes in Rio's best iron ore, copper and aluminum assets.

These subterranean assets rank among Australia's glittering natural resource jewels, and shareholders can point to these being handed to essentially a foreign government. One shareholder, Ausbil Dexia chief executive Paul Xiradis, said that he would prefer if these assets were kept out of the deal and that all shareholders should have access to any capital raising, echoing comments made by the Australian Foundation Investment (AFI) Co, which is Rio's biggest local shareholder.

Ultimately, therefore, the deal may hinge on political and strategic concerns. Just weeks after Australia released its new Defense White Paper, which in the main assesses the country's future defense needs in the light of an opaque Chinese military expansion, the Rudd government may wish to evade allegations that it is overtly pro-Chinese, fuelled by some furtive carry-on in recent weeks, such as a meeting between the PM and Beijing's chief spin-doctor (and fifth ranked Politburo official) at The Lodge, which was not publicized in advance.

Assessing the proposed Rio Tinto-Chinalco deal, Australia's Opposition leader Malcolm Turnbull called for China to privatize its state-owned entities, while the National Party and Green Party have also spoken out against the deal. However, with a government decision mere days away, all parties were remaining tight-lipped about their latest views, ditto for the Australian Foreign Investment Review Board and shareholders AFI and Ausbil Dexia, when contacted by Asia Sentinel recently.

Malcolm Cook is Director of East Asian Studies at Sydney's Lowy Institute for International Policy – which lists Rio Tinto as one of its funders. He told Asia Sentinel that "I would be very surprised if the Foreign Investment Review Board (the government agency tasked with assessing the Rio-Chinalco deal) gives it unconditional approval."

If the deal is scuttled, or diluted, the impact on bilateral relations could be hard to assess. Cook believes that the abortive attempt by the Chinese National Oil Company to buy American outfit UNOCAL in 2005 may have reduced expectations in Beijing about the feasibility of western companies and states consenting to large-scale Chinese investment in strategic resources.

Australia's relationship with China is almost exclusively commercial - even if Free Trade Agreement negotiations have gone on for two years with little sign of progress. China buys Australian raw materials, and Canberra needs the Chinese market, all of which adds to the already high-stakes surrounding this deal. However, it may be easier than anticipated to separate business from politics in this case. Treadgold reminded Asia Sentinel that 'the Chinese have 4,000 years of political and business experience, they can see what is going on now with this deal, and if it fails to go ahead, it will not have any real adverse impact on bilateral relations."