The Australian government said on Monday it would take its time before deciding on China's planned $19.5 billion investment in Anglo-Australian miner Rio Tinto Ltd/Plc, helping send Rio shares sharply lower. State-owned Chinalco, China's top aluminium maker, agreed last month to pay $12.3 billion for stakes in Rio's key iron ore, copper and aluminium assets and $7.2 billion for convertible notes that would double its equity interest in Rio to 18 percent.
The deal needs Australian foreign investment approval, but some politicians are wary of handing stakes in some of the country's most important mines to China, which is Australia's biggest export customer.
They argue it would be in China's interests to keep Australian export prices low. "This is a very significant decision," Australian Treasurer Wayne Swan told a press conference called to discuss the domestic economy. "The government will take its time to evaluate it in great depth and detail. It's very important that we get this right in the national interest."
Chinalco's new president, Xiong Weiping, is in Australia this week to lobby the government and talk to shareholders who worry the deal is a quick fix for Rio Tinto to cut its $39 billion in debt, but will reduce other shareholders' returns. Looking to reassure Australians about Chinalco's investment, Xiong reiterated that Rio would remain independent, with Rio Tinto management controlling strategy and operations. Chinalco would not influence pricing of Rio's products, he said.
"So this transaction will in no way lead to any control of the natural resources in Australia," he told reporters in Sydney, speaking through a translator. "It's controlled by our own hands and not by the Chinese government," Xiong said, referring to Chinalco's autonomy in making commercial decisions. Rio shares were down 6.4 percent at A$44.23, faring worse than the wider market, which was 2.8 percent lower.
Fund managers blamed the slide on a range of factors, including uncertainty over whether the Chinalco deal will be approved, worries about the US recession and shrinking demand from Chinese steel makers. Rio Tinto's shares have been under pressure since bigger rival BHP Billiton scrapped a $66 billion hostile bid last November, leaving Rio vulnerable to deadlines on $19 billion in debt at a time when metals prices have collapsed.
"Rio investors are probably a tad nervous, given they've already seen the proposed merger with BHP fall over," said Tim Schroeders, portfolio manager with Pengana Capital, which owns Rio shares. Shareholders have questioned whether Rio was getting a good enough premium for the asset stakes; a fair premium for the convertible bonds; the involvement of Chinalco, a customer, in marketing joint ventures; and the impact of Chinalco getting two seats on Rio's board.
The Rio deal is the biggest of three involving Chinese investment in Australian miners that the government is set to review. The Labour government, which has said it welcomes foreign investment, has said it would scrutinise them separately. The other two involve Chinese state-owned metals trader Minmetals making a $1.7 billion rescue bid for OZ Minerals Ltd, the world's second-largest zinc miner, and Chinese steel maker Hunan Valin Iron and Steel Group buying a 16.5 percent stake in iron ore miner Fortescue Metals Group for A$1.2 billion.
Xiong said there was no plan to sell assets or stakes acquired in the Rio transaction, adding that Chinalco was talking to financial institutions in China about financing the deal, promising it would be on commercial terms. Xiong said the timing of completing a deal depended on many conditions, including government approvals and the finalisation of financing documents and approval by Rio shareholders.
"We have a lot of work to do before we can complete this transaction by the end of July." A deal between Rio and Chinalco would enable Rio to pay off $19 billion in debt well ahead of an October 2010 deadline. It took on the debt load when it bought Canadian firm Alcan in 2007, near the top of the commodities boom.
Some of Rio's major shareholders have protested their holdings might be diluted and are pressing Rio Tinto to offer new shares to them on the same terms as Chinalco. "We do not see any changes to this packaged agreement," Xiong said. He said to avoid any potential conflict of interest, Chinalco and Rio had agreed to establish a conflict of interest committee.
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