By staff reporters Zhao Jianfei, Chen Zhu, Yan Jiangjing, Zhang Boling, Dong Lingxi and Yang Yue

From Caijing Magazine

Wearing a suit without tie, a homebound Xiao Yaqing waits at an elevator door at the offices of China’s largest aluminum concern Chinalco. “Soon I won’t be getting paid (here),” he jokes. “Please still let me in for lunch.”

As the elevator descends, 50-year-old Xiao contemplates his rising career. He’s not really worried about lunch; he’s a national hero for promoting overseas acquisitions, and one of the most closely watched business leaders in China.

Xiao is also getting a new job as a high-ranking government official. February 16 was his last day as Chinalco’s general manager. The following day, he was seated as a vice secretary-general of the State Council, a vice ministerial post.

Under Xiao’s leadership, state-owned Chinalco prospered at home and abroad. The company paid US$ 1 billion in 2008 to the U.S. aluminum giant Alcoa for a stake in Australian mining concern Rio Tinto. He oversaw an additional US$ 14 billion payout for a 12 percent stake in the company last year.

Shortly before Xiao accepted the State Council post, he engineered another coup for Chinalco: A plan to inject an additional US$ 19.5 billion in Rio Tinto -- an unprecedented overseas investment for a Chinese company. The deal is now being reviewed by government regulators in several countries.

Xiao Yaqing

Not all of China’s overseas deal-making in the resource sector has lifted fortunes like Xiao’s. A few years ago, China’s Minmetals tried but failed to buy the Canada’s largest mining company, Noranda Inc. An earlier flop was Chinese oil concern CNOOC’s attempt to buy the America’s Unocal.

Some deals worked, however. China has successfully invested in overseas iron ore ventures through the jointly operated Channar Iron Ore Mine in Australia since the 1980s. Alcoa’s oxidized aluminum projects started attracting Chinese investment in the 1990s. China National Petroleum Group bought Kazakhstan Oil in 2005.

Chinalco’s plan to boost its stake in Rio Tinto is not a sure thing. It’s now clear – and painfully so after the Noranda and Unocal failures – that concerns of target companies and the national interests of their home countries play into these equations as well. Australia’s government could throw a wrench into the Chinalco plan. The Chinese government has a considerable stake as well.

Regardless, overseas resource shopping is receiving an enormous amount of attention. The story is important because of China’s distinction as a huge consumer of minerals, oil and other natural resources.

Based on its current industrialization trajectory, China has no choice but to move upstream in the resource industry. At stake is the long-term sustainability of an economy with an immense appetite for resource inputs.

Rutted Course

Going abroad has not always been a popular course for Chinese companies tied to the resource sector.

“Do not meddle with overseas projects” was a 1990s warning uttered by Xu Hanjing, a general manager of China Nonferrous Metals Import and Export Corp. (CNMIEC), China’s largest overseas investor. Later the phrase was adopted by his successor, Zhu Guang, now a senior vice president at Minmetals.

Some years ago, when economic reform and opening was just a slogan in China, few realized how important foreign energy and mineral resources would be for the country. Plans for overseas acquisitions were rare and often controversial.

The cautious Xu was among the first business leaders to test the risky waters of overseas investment. Today, at age 55, he’s more reflective about the dreams and realities of the Chinese mining industry. He agreed to an interview with Caijing on a rainy Saturday last August in a Beijing restaurant. His story is woven into the fabric of the modern history of China’s mining industry and its going abroad strategy.

Xu took a position at CNMIEC’s foreign affairs department in 1984, about a year after the company’s founding. He was in charge of translation – a skill he honed at a publishing company that translated the Encyclopedia Britannica after graduating from Chengdu University of Science and Technology with an English degree.

The encyclopedia job was “an eye opener” to the world outside China, Xu said. “Before that, I thought there was only one event in 1921: the establishment of the Communist Party of China,” he recalled. “After a quick look at the encyclopedia, it seemed quite a lot had happened” that year.

Xu worked his way up the ladder and was appointed a CNMIEC representative in Australia in 1989 -- six years after China’s premier and China International Trust and Investment Corp. (CITIC) Assistant General Manager Jing Shuping visited Australia to discuss the country’s western iron ore reserves. Jing had recommended the use of domestic and international resources as well as overseas resource investments to boost China’s economy – an idea backed by the State Council and Australia at a time when the iron ore industry was struggling.

Even before his arrival, in 1987, the China Metallurgical Import and Export Co. (CMIEC), under the Ministry of Metallurgy and led by the State Council, had set up China’s first investment in overseas assets through a joint mining agreement with Hamersley Iron Ore Co., a subsidiary of Rio Tinto’s precursor CRA, for an iron ore mine called Channar. That same year, CITIC acquired a 10 percent stake in Australia’s Portland Aluminum and later increased that holding to 22.5 percent.

The Channar mine’s investment totaled US$ 200 million -- 60 percent of which was financed by the Australian side and 40 percent by the Chinese side. The Chinese party had promised to sell 10 million metric tons of iron ore. The contract was to end when a 200 million ton extraction limit was reached, or in 2012, whichever came first.

But the Channar project sparked debate in China, recalled Dong Zhixiong, a former China Steel Group vice president who was in charge of the Channar project at CMIEC. Some criticized the agreement as an “unequal treaty” and wondered why, for a project it owns only a 40 percent stake, China should be responsible for all the sales. The dispute was settled when the State Council approved the investment.

The program has become China Steel Group’s main source of profits in recent years, thanks to rising international iron ore prices. But selling several million tons of iron ore was not an easy task during a mining industry downturn in the 1990s.

“There was no trick” to the process, Dong said. “Each year, the Ministry of Metallurgy would meet and exert strong pressure on companies to buy, often on credit. At the end of the year, receiving payments proved difficult.”

Against this backdrop, investment in overseas mineral resources became a sensitive topic. Dong told Caijing that CMIEC once set its sights on an iron ore project in South Africa that offered a yearly supply of 5 million tons. But the Channar deal left a bad taste, and afterward no one dared invest.

At that time, the Chinese government offered little support to companies interested in acquiring overseas resources, said China Steel Industry Association (CSIA) Secretary General Shan Shanghua. A major reason was that the country’s foreign exchange reserves were insufficient. Before the late 1990s, all overseas acquisitions required special approval. For example, Capital Steel’s 1992 acquisition of Peru’s Marcona Iron Ore needed specific State Council approval.

Moreover, some government voices argued that companies should utilize domestic resources rather than spend money for mines and labor abroad. As a result, acquiring mineral resources abroad was sometimes criticized as “foolish.”

“At that time, there wasn’t enough understanding of mergers and acquisitions,” Dan said. “No consideration was given to changing a national policy to encourage the use of domestic and international resources.”

Few overseas investment projects were made through the 1990s. In addition to Capital Steel’s US$ 120 million purchase of a 98 percent stake in Marcona – a weak investment, as it turned out – the Chinese steel company Angang and Australia’s Terman Co. agreed in 1994 to jointly developed Western Australia’s Giuliaono mine.

Meanwhile, as CNMIEC’s man in Australia, Xu was far away from debates at home over overseas investments. That freed him to pursue resource deals. He started using Chinese teams for resource explorations in Australia. Then, with US$ 30 million from CNMIEC, Xu set up a wholly owned subsidiary Sino Mining International. In a few years, he worked his way up to general manager.

Sino Mining became China’s earliest overseas mining investment platform. Its first major move was the purchase of the oxidized aluminum business of Alcoa Worldwide Alumina and Chemicals (AWAC), a cooperative project of Alcoa and Australia’s WMC. Sino Mining paid US$ 240 million, and Alcoa agreed to provide 400,000 tons of oxidized aluminum at cost annually for 30 years. The contract was worth an estimated US$ 2.1 billion. CNMIEC and its successor, Minmentals, eventually saw a substantial return on the investment.

But the Sino Mining venture failed to meet its potential. The company had an option to increase its investment in three phases over three years. Each phase would have raised the amount of oxidized aluminum by 200,000 tons, for an annual total of 1 million tons. But at the turn of the century, CNMIEC found itself in dire straits, unable to make any extra investment.

Xu’s career slipped as well. Despite his status as a pioneer for overseas investments, he lost his job and his marriage failed.

Sino Mining’s Legacy

But Xu stayed in the game. Now, he’s the executive director at Sino Gold (ASX: SGX, HKSE: 01862) and in charge of the company’s mainland operations.

Sino Gold is considered China’s only successful foreign-linked gold company. It’s listed on the Australian Stock Exchange and joined the Hong Kong exchange in 2007. It was built on the remnants of Sino Mining, which dissolved in a management buyout after shifting its oxidized aluminum operations to Minmetals in 2000.

When Sino Mining was established, Xu opted for a western mode of operations with three, core executives lured from Australia’s Macquarie Bank. Nick Curtis, formerly responsible for the bank’s bulk commodities, became CEO, while Curtis’ right-hand man Jacob Klein took a post on the executive committee and was promoted in 1999 to vice director of operations. Michael Cosgrove, formerly of the Macquarie’s Corporate Finance Division, took charge of development.

Klein later became the CEO of Sino Gold, while Cosgrove is now CEO of Asian-American Coal Co. Both continue working in China.

Today, Xu is a controversial figure in China. But he still has a vision of using foreign investment to obtain the natural resources China lacks. Rising about peers in China’s non-ferrous metals industry, his company pioneered the internationalization of the sector. And the cause lived on even after CNMIEC dissolved and Sino Mining’s staff dispersed.

Any large resource acquisitions by Chinese enterprises now and in the near future will be built on a personnel base Xu assembled to promote and execute such deals. These include 42-year-old Wang Wenfu, now president of Chinalco Overseas Holdings Ltd. and a core member of the team that initiated Chinalco’s moves on Rio Tinto. Another is Zhao Zhenggang, who used to work at the overseas branch of CNMIEC’s planning department. He also served as a board secretary at Sino Mining, and today is overseas development director for Chinalco.

Minmetals Setback

Xu’s vision sharpened considerably in 2004, when Minmetals launched its bid for Noranda. That spring, the Canadian company’s CEO Derek Pannell took a call from Yang Jianzhen from Brookfield Asset Management’s Beijing office. Yang said a Chinese company named Minmetals was hoping to participate in a deal for Noranda.

“Minmetals? Who? Do they have money?” Pannell reportedly asked incredulously. But he couldn’t hang up. He had to listen to Yang because Brookfield owned 42.5 percent of Noranda.

It became clear that China was no longer shy about overseas acquisitions. Enterprises such as Minmetals as well as the government were, after 20 years of rapid economic growth, ready to step onto the world stage in search of commercial opportunities. The man who pushed for and led the proposed US$ 4 billion acquisition – which would have been China’s largest overseas acquisition -- was Zhu Guang, vice president of non-ferrous metals for Minmetals.

At the time, Toronto-based Noranda was the world’s ninth-largest producer of copper, third-largest producer of lead and third-largest producer of zinc. It also had considerable production capacity for aluminum. And although the company’s mining costs were not the lowest in the world, its high-quality assets were hard to come by.

Minmetals was then China’s largest metals and minerals trading company, with US$ 4 billion in total assets and US$1.2 billion in net assets -- less than half Noranda’s. As a trading company, Minmetals was exposed to significant price volatility. Thus, company President Miao Gengshu was recommending “industrial restructuring” and “resource control.” Acquiring Noranda became a litmus test for Minmetals’ “industrial transformation” which, if successful, was expected to reduce pressure for the company to merge.

A source told Caijing that Minmetals was also following the directions of the State-owned Assets Supervision and Administration Commission (SASAC), whose Director Li Rong demanded in 2003 that state enterprises become “bigger and stronger.” Li’s goal was industry leadership within three years. That put enormous pressure on state companies.

Minmetals, through an open tender, bought 100 percent in Noranda for US$ 4.2 billion, beating competitors including Brazil’s Vale and South Africa’s Anglo American. But the transaction met resistance in Canada as well as within certain Chinese government departments. Amid the dickering, non-ferrous metals prices skyrocketed, taking Noranda’s share price with them. Soon, the US$ 4.2 billion offer looked pretty small.

A participant in the transaction told Caijing that Minmetals’ biggest obstacle was the National Development and Reform Commission (NDRC), which frowned on Minmetals’ prospects.

“NDRC officials thought the Minmetals platform was too small, that it was just a trading company and did not have managers with experience in mining industry production and operations,” the source said. “So they dragged their feet on the approvals.”

Caijing learned that NDRC insisted Minmetals ally itself with several domestic steel companies if it wanted to complete the acquisition. As the exclusive negotiation period with Noranda was about to expire, NDRC even asked CITIC to step in and take Minmetals’ place in the deal – an idea rejected by the Canadian company. Another analysis, however, said Minmetals failed because it was relying on bank loans to finance the acquisition.

The deal collapsed in late 2004. Coincidentally, at the same time, Miao reached the mandatory retirement age.

In the end, Noranda was acquired by the Swiss Xstrata in September 2005 for US$ 19.2 billion -- nearly five times above Minmetals’ original offer. It was a devastating experience for Minmetals’ acquisition team.

“It seemed like nothing we did was of any use,” a team member told Caijing. “We couldn’t make a deal happen.”

Though deemed risky at the time, such a deal today would be seen as a rare opportunity by many in China and spared the kind of indecisiveness among authorities that apparently doomed the acquisition. After losing Noranda, Minmetal’s vitality was sapped, and the transaction team members went their separate ways.

Zhu Guang, the deal’s original engineer, still works at Minmetals, as a senior vice president. But he’s faded into the background and, to this day, labors without a specific assignment.

Insatiable Appetite

Minmetals’ failure marked the true start of China’s overseas mining ambitions. It was also a new beginning in China for awareness of overseas acquisitions. In subsequent years, as mineral prices skyrocketed, Chinese companies saw the importance of upstream participation.

An official once in charge of overseas investment for a Chinese steel company told Caijing that, in the 1990s, the Ministry of Metallurgy had organized Baosteel, Wuhan Iron and Steel, Maanshan Iron and Steel, and other steel companies to discuss cooperative projects in Australia and Brazil. But the companies showed little interest.

“Those companies at the time weren’t optimistic about the iron ore market and feared that, after developing a mine, they wouldn’t be able to sell their ore,” the official said.

On the other hand, even though China made “going out” a national policy in 2000, officials in charge of overseas investment approvals still controlled the fate of such acquisitions. That opened a door to rampant power abuse.

A typical example was He Lianzhong, director of the State Planning Commission’s Overseas Investment Foreign Investment Department. After structural reform in 2003, He took a position as assistant inspector at NDRC, until he was investigated in 2005 by party discipline authorities. During that time, several missed acquisition opportunities appeared to have been connected to He. In 2007, he was sentenced to 12 years for taking bribes.

As recently as 2004, the Australian resource company Fortescue’s CEO Andrew Forrest was repeatedly rebuffed while visiting China in search of investment opportunities. An unyielding NDRC director at the time not only required that the China Metallurgical Science and Industry Corp. represent Chinese steel companies in any investment negotiations, but also required that the Chinese side to obtain a controlling interest. In the end, the two sides parted on bad terms.

Despite this obstacle, Fengli Group – founded by Wu Yueming in Jiangsu Province -- bought 5 million shares of Fortescue for AU$ 1 per share. At the time, NDRC said the move was unapproved and against regulations. But after a number of twists and setbacks, Fengli’s deal finally won approval. Since then, Fortescue has grown to become Australia’s third-largest iron ore producer.

Since the current phase of worldwide energy and mining company consolidations began in the 1990s, single-metal mining companies have expanded to become multiple-resource miners, and domestic mining companies have embraced a global focus. These circumstances have led to a greater concentration of mineral resource control.

Rio Tinto was formed in December 1995 through the combination of mining companies RTZ and CRA. Vale privatized and began consolidating the iron ore industry two years later. In June 2001, Australia-registered BHP Ltd. combined with Britain’s Billiton Plc to create BHP Billiton. Today, these three companies control more than 70 percent of the world’s iron ore trade.

In the aluminum market, Australia’s Alcan in 2000 acquired the Swiss company Alusuisse. In early 2004, it bought France’s Pechiney Aluminum. And in September 2007, Rio Tinto acquired Alcan for US$ 38 billion.

Through it all China, as the largest consumer of mineral resources and energy, stood by and watched. It was clear, however, that a main target of these acquisitions was to build an operation that would appeal to China’s massive appetite.

China relies on imports for more than half of its iron ore production. According to the China Steel Association, iron ore imports have grown about 20 percent per year since 2000. Last year, when China’s domestic production growth peaked, iron ore imports grew 15.8 percent over 2007.

To this day, China’s overseas iron ore interests amount to only 40 million tons, or less than 10 percent of import volume. Resource-starved steel giant Japan, on the other hand, holds overseas iron ore assets equal to more than 60 percent of imports.

In addition to iron ore, China imports many other kinds of non-ferrous minerals each year. Liu Boya, a metals analyst at Macquarie, said 75 percent of China’s copper needs and nearly 30 percent of its lead and zinc must be imported.

With three iron ore producers in the global driver’s seat, iron ore prices have inched steadily higher since 2004. Rio Tinto and BHP Billiton negotiated price increases of 96.5 percent in 2008. And for Vale’s Carajas mineral block, the contract price that was US$ 16.90 per dry metric ton in 2000 had quadrupled to US$ 81.36 by 2008.

“For bulk raw materials, this was enormous growth,” Xu Xiangchun, Beijing Steel Union chief information officer, told Caijing.

“Skyrocketing iron ore prices set ‘going out’ in motion,” said Xu. “Now that prices are high, companies are afraid they won’t be able to buy iron ore.”

Signals from Chinalco

In the months leading to its latest Rio Tinto bid, Chinalco was preparing to launch an IPO. A three-executive team took the helm for the company’s overseas effort. Zhao left his CNMIEC job to work for Chinalco’s IPO office and later became the director of the company’s overseas development department. Wang had already joined Chinalco’s overseas holding company after jumping from the China Minmetals ship at the end of 2003. They were joined by Tai Yu, a former London trader who was one of the principal players behind Minmetal’s 2004 talks with Noranda.

（Chick to enlarge）

Chinalco is far from the largest biggest or strongest of China’s top 100 state-owned enterprises. But in January 2008, it won international fame overnight by partnering with Alcoa for a US$ 1.45 billion purchase of 12 percent of Rio Tinto. Chinalco thus became that company’s largest single shareholder.

The purchase of Rio Tinto shares not only surprised BHP Billiton, which itself was bidding for the Down Under miner, but also exceeded the expectations of Chinalco insiders. One Chinalco source involved in the transaction told Caijing, “We didn’t think we’d succeed at the beginning. It just seemed like a direction that we needed to start moving in.”

After the acquisition, Xiao told his group, “This is just the first step.” He knew Rio Tinto’s stock would tumble after the failed merger with BHP Billiton. So he began to prepare.

Across-the-board global mineral prices were dropping like rocks in late 2008 as the economic crisis spread. BHP Billiton dropped its bid for Rio Tinto, and in Rio’s stock value fell below 11 pounds, resulting in a startling loss on Chinalco’s balance sheet.

But Xiao said repeatedly that his goal was to stop a merger of the two mining giants -- and that he had succeeded.

It was then that Rio Tinto, itself mired in debt, gave China another opportunity. In December, the company said it would lay off 13 percent of its workers and cut 2009 capital expenses by US$ 5 billion. However, US$ 8.9 billion of their more than US$ 40 billion in debt was coming due in October 2009, meaning Rio needed a repayment strategy to present to stockholders before issuing 2008 results in February.

Xiao took his second big step February 11 in the London law office of Clifford Chance, where he signed a contract that he said he “couldn’t even imagine.” In the agreement, Chinalco said it would inject US$ 19.5 billion in cash into Rio Tinto by purchasing assets and through other debt-reducing strategies.

“The amount of capital we’re using to cooperate with Rio Tinto is the largest of its kind in the world,” Xiao said later in Beijing. The foreign press called it a “pearl on the crown.”

This cooperation between Chinalco and Rio Tinto would include almost all Rio’s best holdings in copper, iron ore and other minerals. The transaction would assure a steady supply of iron ore and bauxite for Chinalco. Under the contract, their venture would include a hefty percentage of the Weipa mine bauxite sold outside Australia, in addition to 30 percent of Hamersly mine’s iron ore sales to China. Chinalco would also receive a secure, 25-year supply of Weipa bauxite.

Xiao said ties with Rio Tinto would raise the level of Chinalco’s international management. “Through this cooperation, we gained completely new knowledge in the fields of international capital operations, mergers and acquisitions, and corporate management.” he said. “We also saw the enormous differences between Chinese state-owned enterprises and international corporations.

“If the deal goes through, we’ll send several of our managers to work at Rio Tinto,” Xiao said. “This will be a very valuable asset.”

As Xiao closed the deal, another Chinalco team led by Deputy CEO Lv Youqing and overseas executive Tai arrived in Australia. Soon they submitted a request to Australia’s Foreign Investment Review Board (FIRB), which is now deciding whether to give the transaction a green light.

Bigger Picture

Chinalco’s latest plan was one of several Australian initiatives hatched by Chinese enterprises in February. In a span of just two weeks, enterprises announced investments in Australian companies worth a combined US$ 21.1 billion – an amount equal to more than 40 percent of China’s total overseas investments in 2008.

Data provided by Dealogic shows 97 percent of the money invested so far this year was aimed at overseas natural resources, while 90 percent was earmarked for Australian companies.

According to the Ministry of Commerce (MOC) and State Administration of Foreign Exchange (SAFE), China’s direct overseas investments stood at US$ 52.1 billion in 2008. Of that amount, 60 percent was steered toward resources and 7 percent went for Australian projects.

A source familiar with the situation told Caijing that “many Chinese companies are currently in overseas acquisition talks, and some companies are competing with each other for the same projects.”

The apparent stampede has generated some backlash, raising concerns among shareholders at target companies as well as foreign governments. Some fear the Chinese government is pulling strings.

At the same time, many industry insiders in China have warned that the recent coinciding investment announcements may make it more difficult for Chinese companies to win approvals from foreign governments. They also wonder whether the deals could have been better coordinated.

China does not have a central coordinating organization to direct recent overseas acquisitions. The National Development and Reform Commission (NDRC), however, reviews competitive environments surrounding proposed overseas deals before deciding whether a plan fits the country’s development strategy. This review is a key step in a process that requires potential acquisitions to be approved by NDRC as well as MOC and SAFE.

NDRC has become more supportive of Chinese companies bidding for overseas assets since 2004, when the agency rejected Minmetal’s proposal to buy Noranda. It also blocked Fortescue’s effort to lure Chinese investment. The government’s latest response is being viewed by some as a reaction to current market conditions, with companies taking the lead.

Philip Andrews-Speed, an energy resources professor at the University Of Dundee in Scotland, draws a line between government control and support. “I don’t think (the recent Chinese acquisitions) are orchestrated by the government,” Andrews-Speed said. “It can only be seen as government supported. The core motivation is the enterprises’ desire to catch up, the chance to expand.”

Indeed, many recent deals have been topics of negotiations for years and only now have reached the decision stage due to recent changes in market conditions and eased government controls.

There’s no denying that supportive policies have whipped up overseas ambitions among Chinese companies, including central state-owned enterprises, companies controlled by local governments, and the state’s sovereign wealth fund.

In February, for example, China’s newly established National Energy Bureau announced a plan to boost international cooperation in the energy sector and encourage domestic energy companies to expand overseas. The government also released a steel industry stimulus plan to support Chinese companies in exploring overseas mining markets.

At the same time, the flurry of activity has raised suspicions in foreign markets – and even fear in countries such as Britain and Australia. Some of the more serious reactions have put the huge investment plans at risk.

“The stampede of Chinese company bids for overseas assets may fail due to increasing political hurdles,” said Macquarie’s Liu. Projects now pending foreign government review are “not only decided by economic factors.”

Seeking Common Benefits

Perhaps not coincidentally, Australian Finance Minster Wayne Swan on February 11 announced that his government would start viewing convertible bonds as shares when considering overseas investments. Some observers think this adjustment stemmed from the Chinalco-Rio Tinto deal, which includes US$ 7.2 billion in convertible bonds.

But Chinalco insiders say there were communications with Australian regulators before the deal was announced, and that the company was not surprised by Swan’s statement. What appeared to be a sudden policy change was actually designed to convince Australians that the government was simply doing its job.

Indeed, Chinalco’s 2008 deal for Rio Tinto shares on the British market did not involve talks with the Australian government; the application for Australian regulatory approval came after the deal was inked.

Nevertheless, Australian regulators have come under pressure and the Chinalco deal faces many obstacles, including opposition from some Rio shareholders, unions and human rights groups.

Australian citizens and labor unions are worried about the possible effects of Chinese purchases of Australian resources. Some concern stems from Chinalco’s investment in Rio Tinto, but there is also broader anxiety over Chinese investments in general. Some critics frowned on Minmetals’ investment in the mining company OZ and Hualing’s bid for Fortescue shares.

Rio Tinto’s second-largest shareholder, Legal and General Investment Industries (L&G), has asked the board of directors to consider other solutions to the company’s financial predicament, such as selling new shares to existing shareholders. “The priority of shareholders is important,” said L&G, which now hopes all Rio Tinto shareholders will find a mutually acceptable solution.

The Australian government’s regulators, on the other hand, have neither a board of directors nor Rio Tinto shareholders to satisfy. Instead, they analyze deals according to perceived national benefits. And Swan has had a circumspect attitude toward the US$ 19.5 billion deal.

“Our government will consider the particulars of this deal on the basis of national interest,” Swan said. “Since Chinalco is Rio Tinto’s customer, this deal will receive a great deal of scrutiny.”

Australian Senator Barnaby Joyce is among those protesting. “When they come here to buy Australia’s resources, it’s very hard to turn them away once they’ve arrived at your doorstep,” Joyce said. “It’d be best if there remained a distinction between client and owner.”

Relatively speaking, local governments in mining areas affected by a Chinalco-Rio deal have been welcoming. Colin Barnett, premier of Western Australia, supports Chinalco’s plan to boost its stake in Rio to 18 percent -- but he also hopes that’s where it stops. Western Australia is the country’s primary producer of iron ore.

Anna Bligh, premier of Queensland, voiced support for the deal soon after the London announcement. Queensland is currently working with Chinalco to develop bauxite production. Bligh said, “The contract between Chinalco and Rio will be extremely beneficial to the local economy. I hope the federal government will allow the deal to go through.”

As this edition of Caijing went to press, Australia’s Chinese-speaking Prime Minister Kevin Rudd had yet to comment on the deal.

But a leading figure in the Australian mining industry told Caijing the extent to which his country allows Chinese participation in the resources industry will be determined by the amount China privatizes.