HONG KONG - Executives of
China's largest aluminum
producer this weekend are nursing their failure to secure the country's biggest
overseas investment and plotting where to go now, after Rio Tinto
rejected their US$19.5 billion proposal to buy an increased stake in the
Australian mining giant.
Xiong Weiping, president of Aluminum Corp of China (Chinalco), said in a
statement on Friday that the company is "very disappointed" with the failure of
its investment plan.
"In recent weeks, Chinalco has been working hard to negotiate with Rio Tinto to
make appropriate amendments to the transaction terms of the deal the two sides
entered into on February 12 ... to
better reflect the changed market background and feedback from shareholders and
regulators," Xiong said.
"We continue to believe our proposal presented an outstanding value-creating
opportunity for all Rio Tinto shareholders and would have provided a strong
platform for a long-term strategic partnership between the two companies."
The agreement signed in February would have secured for Chinalco a source of
raw material in return for investing $7.2 billion in convertible bonds and
$12.3 billion in Rio Tinto iron ore, copper and aluminum stakes, helping to
reduce the heavy debt load of the world's third-biggest mining company. The
deal would have doubled Chinalco's Rio stake to 18% from 9%.
Rio, which carries about $39 billion in debt, now says it will sell shares to
raise as much as $15.2 billion. Fellow Australian miner BHP Billiton has also
agreed to pay Rio $5.8 billion to form an iron ore joint venture. BHP and Rio
may save more than $10 billion by combining their iron-ore assets in
Australia's western Pilbara region, according to a statement by the companies.
The Chinalco agreement was criticized by other Rio shareholders, including its
third-largest investor, Legal & General Group, for excluding their
participation. Many Australians were also concerned at seeing a foreign entity,
and particularly one run from communist-ruled China, take such a sizeable stake
in an important company and foreign-exchange earner.
The Rio board's decision saves Australian Prime Minister Kevin Rudd from having
to decide whether to permit Chinalco to increase its stake as planned.
Australia's Foreign Investment Review Board was preparing to make a
recommendation. If followed by a Rudd vote for the deal, he would have angered
many voters; a decision against would have risked undermining dealings with
Beijing.
Australia has benefited hugely from China's fast economic growth, and even amid
the global downturn sales of goods and commodities to China increased 37% last
year.
China is the top buyer of iron ore and Rio the world's second-largest supplier.
A closer relationship between Chinalco and Rio could have put more power into
the hands of China in price negotiations.
Speculation about the status of the deal intensified as the overall market
changed significantly since February, with credit markets easing and concern
diminishing that the world was heading for a total financial meltdown. Prices
across global share markets have also surged since March, while demand for
Australian iron ore and other commodities has picked up, strengthening the hand
of the Rio board.
Even so, Rio’s rejection of the proposal on Friday was not bad news to
Chinalco, said Mei Xinyu, senior researcher in the Research Institute of
Foreign Trade and Economic Cooperation of the Ministry of Commerce.
"If the terms of their planned deal in February involved too many amendments,
it would not be good to the buyer who pays such a high price," he said. One
rumored possibility was that Chinalco would agree to reduce its proposed
holding to 15%.
Mei rejected criticism by other shareholders that they were being excluded from
the agreement.
"Chinalco could respect Australia and other shareholders’ legitimate rights in
Rio, but it could not be forced to do charity work with tens of billions of
dollars by allowing shareholders other than Chinalco to participate in the
matter of the $7.2 billion convertible bond," he said.
Nor would the collapse of the deal turn investors away from mining shares, said
Guosen Securities analyst Wang Junqing.
"What investors seeking exposure to mining are concerned about is the
industry's outlook, which looks pretty good as stimulus packages are kicking in
and energy prices are going up," he said.
Shares of both the Chinese and Australian companies gained on the news, as
about four months of speculation over its success or failure came to an end.
Chinalco's Shanghai-listed shares closed up about 0.7% at 12.47 yuan after
gaining 2.18% in the morning session. Rio's shares jumped 8.4% to A$72.49.
The failure of Chinalco's bid will reduce the risk of a higher debt burden on
the Chinese company while also removing concern among investors on the
company's ability to manage such a large overseas company.
Whatever the commercial reasons for the failure, the Chinese public voiced
strong criticism of the Australian decision. A reader of China Daily wrote in
the paper's website that Australia’s relations with China were "conflicted".
"One the one hand, Prime Minister Kevin Rudd has described Australia as China's
'true friend'; on the other, Rio's rejection of the deal seems to suggest the
very opposite," reader "Lee Kwan" said.
Citing an anti-Chinalco advertisement by Perth, Australia-based millionaire Ian
Melrose as an example, Lee said the Australian government and some Australians
with pervasive Sinophobic sentiments had maintained a negative attitude towards
Chinese companies making investments there.
At the end of May, Australian opponents of Chinalco's link-up with Rio Tinto
used footage of the Tiananmen Square crackdown in a television advertisement
calling on the Australian government to block the deal.
An Internet posting on Sina.com.cn, a leading Chinese portal, noted that China
could buy US bonds but could not buy a mine in Australia - though both were
loss-making businesses.
Another Sina posting criticized the low fee of $195 million Rio was obliged to
pay Chinalco in the event that the deal did not go ahead.
"It’s stupid to ask for such a low break fee for Chinalco. That's why Rio can
break up with Chinalco with little concern," it said. It was time Chinese
companies stopped pouring money into seeking investment overseas, the post
said.
Olivia Chung is a senior Asia Times Online reporter.
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