Shares in mining giant Rio Tinto fell Friday as analysts and politicians questioned its plan to accept a 19.5 billion US dollar cash injection from China's state-owned aluminium firm Chinalco. Amid uncertainty over how Australian regulatory changes will affect China's largest ever investment in a foreign firm, Rio fell as much as 4.7 percent before closing one dollar (65 US cents) off, or 1.92 percent, at 51.00 dollars.
Analysts' opinion was divided over the benefits of the deal, which would allow Rio to reduce its debt burden while giving China more leverage over the resources and raw materials that have fuelled its economic expansion. Perth-based fund manager Ross Denford of investment firm SAS Global described it as a "disgraceful" outcome for Rio, which rejected a take-over offer from rival BHP Billiton at the height of the resources boom.
"They had the opportunity to engage with BHP Billiton and look after their shareholders but now they are selling the farm and will basically become a Chinese company," Denford told Dow Jones Newswires. Analysts at Goldman Sachs JBWere were equally scathing. "We don't like this deal and don't think it is the best option," they said in a note to clients.
"Even with a cash injection of 19.5 billion dollars, Rio is still in a weak position in terms of its balance sheet and would be unable to easily participate in expansions, acquisitions or increased dividend payments for some time," they added. Australia's centre-left government on Thursday announced it would tighten the rules on foreign investments that use instruments such as convertible bonds, a key part of the Rio-Chinalco deal.
Treasurer Wayne Swan on Friday refused to speculate on how the changes may impact on the deal but opposition senator Barnaby Joyce said it should be blocked. Joyce, a member of the rural-based National Party, said it was not in Australia's interest to allow the state-owned firm to lift its stake in Rio to 18 percent.
"It's the Chinese government that'll be buying Australian mines and it's very hard to say (to the) Chinese government when they're in the door, that you don't like the way they are acting," he told public radio. "It's nice to keep a little bit of separation between the major person who buys your minerals and the fact we own them."
However, opposition to the deal was not unanimous, with analyst Gavin Wendt from Fat Prophets saying it offered better value to shareholders than the BHP offer. "If you have a look at the evaluations that are being put around, our rough calculations suggest that what the Chinese are paying for their stake is actually a hell of a lot higher than what BHP was offering Rio shareholders with their three-for-one scrip offer," Wendt told ABC radio.