Controversy Swirls Around Rio Tinto-Chinalco Deal

Posted by: Mark Scott on March 17

When Tom Albanese, chief executive of London-listed miner Rio Tinto, first announced a $19.5 billion strategic partnership with the state-owned Aluminum Corporation of China, or Chinalco, in February, 2009, he must have known it would raise a few eyebrows. The deal could give the Chinese metals giant — one of Rio’s main customers — an 18% stake in Rio Tinto Group (the company is dual-listed in Britain and Australia), as well as access to Rio’s lucrative iron ore, copper, and aluminum assets.

Many of the miner’s institutional investors already are balking at the proposed agreement, but Australian politicians on Mar. 17 took the fight one step further — the same day Rio announced Jan du Plessis as the company’s new chairman as of Apr. 20, 2009.

“If the Chinalco deal with Rio Tinto goes ahead the communist bosses in Beijing will exert control over the management of Rio Tinto’s Australian mineral resources,” news agency Reuters quoted Bob Brown, leader of Australia’s Green political party, as saying.

“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,” Barnaby Joyce, senatorial leader of the opposition National Party, said in a local TV commercial on Mar. 17, according to media reports.

To cap things off, Australia's Foreign Investment Review Board, which regulates overseas direct investment into the country, has extended a review into the proposed Rio-Chinalco deal by 90 days. The final decision is now due in June, 2009.

The controversy surrounds the role Chinalco could play in Rio's businesses. Under the plan, the Chinese will pay $12.3 billion for minority stakes in iron ore, copper and aluminum assets and an additional $7.2 billion for convertible notes to take the equity stake in Rio to 18%. Chinalco would also receive two non-executive seats on the company's board.

Yet as state-owned Chinalco is one of Rio's major Chinese customers, politicians, regulators, and institutional investors are concerned the deal wouldn't be in Rio's long-term best interests. "Chinalco is an arm of the Chinese Government, so you've got a customer, competitor and sovereign government embedded in the structure and we feel troubled by that," Ross Barker, managing director of the Australian Foundation Investment Company, told The Australian newspaper.

Problem is, Rio is in dire need of capital to payoff two tranches of debt -- almost $20 billion combined -- that are due by October, 2010. Investors have called for a rights issue, valued around $12 billion, to fill the gap, but that wouldn't be enough to cover all the financing repayments. Unless cash-strapped investors can pony up the cash, Rio appears to have little choice but to turn to the Chinese for help, no matter the long-term consequences.