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China puts 19 bln dollars into Rio Tinto

Before the global economic downturn, China's virtually unquenchable demand for mineral resources helped drive a decade-long boom in Australia, and China remains the vital market for Australia's resources sector. Photo courtesy of AFP.
by Staff Writers
Sydney (AFP) Feb 12, 2009
China's state-owned aluminium firm Chinalco on Thursday unveiled Beijing's biggest investment ever in a foreign company, putting 19.5 billion dollars into troubled mining giant Rio Tinto.

The two companies said the "strategic partnership" would give Chinalco stakes in mining assets as well as bonds convertible to Rio shares, which could eventually raise its overall stake in Rio to at least 18 percent.

But the move, which would give China more leverage over the resources and raw materials that have fuelled its economic boom, immediately hit an apparent snag as Australia announced plans to amend its foreign investment laws.

"It reflects our continued confidence in the long-term prospects of the industry and the Chinese economy," Chinalco president Xiao Yaqing said of the deal.

"It also allows Chinalco a significant role in a strong industry with excellent growth prospects," he said.

Under the deal, Chinalco would put up 12.3 billion dollars to acquire stakes in aluminium, bauxite, copper and iron ore projects and buy 7.2 billion dollars in bonds that would convert to Rio shares at a later date.

Analysts said the deal, which also gives Chinalco two seats on Rio's board, reflected China's growing economic might on the global stage and its desire to secure a bigger chunk of the world's natural resources.

"It reflects China's growing strength and engagement," said Wang Jianhua, vice-director with the Mysteel Research Institute in Shanghai, adding that China was also looking for places to park its expanding wealth.

"When its capital grows to a certain level, it has to expand," he said.

Xiao later told an analysts' briefing in a London webcast on the Rio website that commercial, not political considerations were paramount in the deal.

"Despite the fact that we are a state-owned company, I'd like to emphasise that we are run completely independently and commercially," he said.

Xiao said the investment was a way for Chinalco to lift its international profile and increase its holding in a company that was set to yield attractive returns over the longer term.

And he hinted at further international expansion.

Rio chairman Paul Skinner said the investment would not change the way his company did business, arguing the miner's independence would not be compromised.

"Strong governance structure will ensure continued commercial focus and independence in all decision-making," he said.

Before the global economic downturn, China's virtually unquenchable demand for mineral resources helped drive a decade-long boom in Australia, and China remains the vital market for Australia's resources sector.

The announcement of changes in foreign investment laws, made by Treasurer Wayne Swan just moments after the Chinalco deal was unveiled, signalled the government plans to scrutinise the deal closely, analysts said.

Swan said the government would toughen the laws on complicated foreign investments that use instruments such as convertible bonds, a key part of the Rio-Chinalco deal.

"It was always our commercial intention to seek approval from the Foreign Investment Review Board on all aspects of the transaction," Chinalco Deputy General Manager Lu Youqing said, according to Dow Jones Newswires.

The deal also needs the approval of Rio's shareholders, who could throw up another obstacle. The Financial Times newspaper reported that some large shareholders had not been consulted about the deal.

"I am absolutely flabbergasted," one told the paper. "It is unacceptable at every level."

Chinese firms have faced problems in the past when trying to buy foreign miners. In 2005 China National Overseas Oil Corp withdrew its bid to buy US company Unocal Corp for 18.5 billion dollars due to a backlash in the US.

Rio Tinto, which had been the target of a hostile takeover by larger rival BHP Billiton until the financial crisis hit, said the cash infusion would provide immediate help in dealing with its substantial debt load.

The deal was announced as Rio said annual net earnings were down 50 percent due to the global slowdown and falling commodities prices. Rio chief executive Tom Albanese said the emphasis now was on paying down that debt.

China's previous biggest investment in an overseas company was the combined 14.2 billion dollars Chinalco and US-based Alcoa spent buying a nine percent stake in Rio Tinto last year.

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