Chinalco Bides Time On Rio Stake

Sydney Morning Herald

Thursday December 11, 2008

John Garnaut

CHINA Inc is unlikely to assist Rio Tinto with a major cash injection any time soon, despite what Chinese officials say is a top-level Government directive for state-owned companies to go out and buy international resources assets at current discount prices.

Rio Tinto announced last night it will slash 14,000 jobs, cut $US5 billion ($7.6 billion) in capital spending next year and accelerate asset sales to repay $US10 billion of debt by the end of 2009 as the global financial crisis curbs demand for metals.

But executives from a major Chinese company arrived in Australia this week with "a surprisingly long shopping list" in hand, according to a source close to the company.

An official delegation has been dispatched to South Africa to examine opportunities for bargains, according to a member of the delegation.

Chinalco, the Chinese aluminium giant, is thought to be the only obvious Chinese candidate for pursuing a big new strategic stake in Rio Tinto because of its existing stake in the company and a Chinese Government preference for not letting Chinese companies compete against each other for foreign assets.

Chinalco enjoys particularly strong ties to the central leadership. The company's president, Xiao Yaqing, is an alternative member of the Communist Party's Central Committee.

The company is considering raising its stake in Rio Tinto to nearly 15 per cent.

"We have a special team monitoring Rio Tinto's performance and market movements in real time and will evaluate the best timing to do the stake increase," Chinalco's vice president, Lu Youqing, told a news agency last week.

But sources close to both companies say there have been no recent direct discussions between the two concerning a larger stake.

Advisers to those companies say there are three reasons why Chinalco is unlikely to make such a move until after Chinese New Year.

The first is the Rudd Government's foreign investment restrictions, which discourage Chinese state-owned companies from acquiring a level of control over major Australian mining interests.

Senior Australian officials say the Rudd Government is unwilling to soften its stance unless the Chinese Government gives substantial ground in free trade agreement negotiations.

However, the Australian Government may be forced to adopt a more welcoming stance if it can be shown that Chinese investment could save Australian jobs.

The second reason is that any major new investment by Chinalco would require the approval of China's State Council, National Development Reform Commission and about six other agencies, which will take time.

Third, sharemarket listing rules would normally require Chinalco to launch a full-blooded takeover offer for Rio if it exceeds 20 per cent of the company's shares in Sydney or 30 per cent in London.

The takeover rules would normally require Chinalco to pay a price at or above the inflated price it previously paid until the restrictions expire in February.

© 2008 Sydney Morning Herald

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