By Don Miller
Rio Tinto PLC (ADR:RTP) appointed a new chairman yesterday (Tuesday) in what was seen as an effort to calm political turmoil in Australia over its $19.5 billion tie-up with China's Aluminum Corp. of China Ltd. (ADR: ACH), also known as Chinalco.
Rio entered the agreement with Chinalco in February to help cut its $39 billion debt burden, but the deal has ruffled political feathers in Australia on concerns key assets are falling into Chinese hands.
After a previous attempts failed, Rio appointed Jan du Plessis, chairman of British American Tobacco PLC (BAT), as its new chairman. Rio chairman-elect Jim Leng quit the board last month, after objecting to the deal.
Du Plessis is on record as viewing the deal as the best chance for Rio to weather the global downturn.
Under terms of the agreement, state-owned Chinalco would pay $12.3 billion for a piece of Rio's iron ore, copper and aluminum mining assets, and $7.2 billion for convertible notes that would double its stake in Rio to 18%.
In its annual report released Tuesday, Rio said it might have to renegotiate $40 billion in debt under potentially more onerous terms if the Chinalco deal was not approved and it failed to complete other planned asset sales.
But that did little to deter Senator Barnaby Joyce, an Australian politician who took out television ads on Tuesday urging that the Chinalco deal be blocked, Reuters reported.
"The Australian government would never be allowed to buy a mine in China. So why would we allow the Chinese government to buy and control a key strategic asset in our country," the ads said. The ads aired in the capital of Canberra and Joyce's home state of Queensland, where Chinalco will mine new assets.
On Monday, Australia's Foreign Investment Review Board extended its examination of the deal by 90 days, an investigation that could make the deal even more difficult. And on Wednesday the Australian Senate is expected to endorse an inquiry into whether foreign investment in Australian companies is in the country's national interest.
If the deal is approved, Rio would give Chinalco "significant influence," and the company should revise the terms of the agreement, Ross Barker, managing director of Australian Foundation Investment Co., told Bloomberg News.
As reported previously in Money Morning, over the past few months, China has capitalized on the financial turmoil that has paralyzed the world's "developed" economies by stocking up on cheap commodities, weeding out competition to its largest state-run companies, and acquiring even more foreign assets.
With commodity prices in a historic swoon, China is scouring the planet for the natural resources it needs to advance its recently unveiled $586 billion stimulus plan – which is primarily focused on infrastructure.
In order to execute the massive infrastructure overhaul, China is using its huge stash of foreign reserves to load up on the raw materials crucial to the endeavor. To keep the ball rolling, the government has encouraged large Chinese companies to go outside and buy resources companies while the commodity market is low.
Chinalco's deal with Rio is just one of those.
In February, China Minmetals made a $1.7 billion (A$2.6 billion) bid for OZ Minerals (ASX:OZL), the world's second leading zinc miner. Hunan Valin Iron & Steel Group Co. quickly followed that deal with an agreement to buy $793 million (A$1.2 billion) worth of shares in Fortescue Metals Group Ltd. (ASX:FMG), which has significant iron ore holdings in Australia's western states.
Both of those deals have raised the hackles of Australian citizens and politicians, who fear China's aggressive moves could spell long-term damage to Australia's mining industry.
Australia is negotiating a free trade agreement with China, although talks have recently stalled. But Trade Minister Simon Crean has firmly stated the free trade agreement was not being used as a bargaining chip over the foreign investment decisions.
Crean said Australians need a better understanding of the importance of more two-way investment between Australia and China, the country's largest bilateral trading partner and second largest export market, according to Bloomberg.
News and Related Story Links:
Rio names new chairman as Chinalco row escalates
Rio Chinalco Deal May Be Probed by Australian Senate
- Money Morning:
What Companies Are Profiting From China's Commodities Crusade?