By staff reporter Yan Jiangning

(Caijing Magazine)Barely 10 days after taking the helm as general manager of Aluminum Corp. of China (Chinalco), Xiong Weiping arrived in Sydney to face what would be a daunting challenge for any newly appointed executive: Addressing government regulators about his company’s proposed investment in the world’s third-largest mining company, Rio Tinto.

The proposed deal, initiated by Xiong’s predecessor Xiao Yaqing, calls for investing US$ 19.5 billion in Australia-based Rio Tinto for a stake in mining assets through joint ventures and convertible bonds. State-owned Chinalco’s stake in the Australian miner would climb to 18 percent from the current 9 percent.

The ambitious acquisition plan is currently on hold pending approvals from the company’s shareholders and government regulators in Australia, where some leaders are concerned about the seemingly aggressive expansion of Chinese companies into their country’s natural resource sectors.

In Sydney, Xiong had a lot of convincing to do – all the way to the top. A key target of his persuasion effort was Australian Treasurer Wayne Swan, who has the right to veto the deal.

Swan and his government’s Foreign Investment Review Board (FIRB) are now carefully reviewing the Chinalco-Rio Tinto proposal. It’s the largest overseas investment ever considered by the Australian government.

At the same time, Swan and FIRB are separately reviewing two other proposed China-Australia resource deals: China Minmetals’ plan to invest AU$ 2.6 billion in OZ Minerals Ltd., and Hunan Valin Iron and Steel Co.’s plan to pump AU$ 1.2 billion into Fortescue Metals Group.

Xiong’s trip to Sydney apparently gave the Australians a lot to think about -- prompting them to buy more time. Australia’s Treasury Department announced March 16 that it would extend the regulatory review period for Chinalco’s investment for 90 days. Three days later, FIRB announced a 30-day extension to review Valin’s proposal.

Meanwhile, analysts expect Australian Prime Minister Kevin Rudd to support the proposed deals with Chinese investors, although they say he needs more time to balance the domestic and international political ramifications.

Easing Suspicions

Australian authorities also need time to weigh their options, particularly in light of the debt weighing down mining companies eyed by the Chinese and skepticism in their country over Chinese intentions – including fears that the Chinese government is orchestrating company efforts to expand into Australia’s resource sector.

Xiong has sought to allay those fears. In a March 2 interview with Australian media, he said that “although Chinalco is a state-owned company, we have been operating as an independent commercial entity from the beginning.”

Indeed, Xiong said before leaving China that his junket’s major goal was to eliminate market suspicions about the deal. “I will lead the team to push forward implementation of the agreement,” he said February 27, a day before departing.

Xiong claimed the deal would not give Chinalco control of Australia’s natural resources, nor change Rio Tinto’s business strategy. He said although the agreement would give Chinalco the right to sell its stake in Rio Tinto to other Chinese state-owned companies, his company currently has no such plan. If such a transaction is sought in the future, Xiong said, Chinalco would “apply for related government approvals.”

These assurances were seen in a positive light by Tom Albanese, chief executive of Rio Tinto and an active promoter of the deal. On March 4, he told Australian media his company’s shareholders were warming to the deal, particularly in light of their likely investment advantages.

“The main alternative to the Chinalco deal is a rights issue that could have raised US$ 10 billion,” Albanese explained. But the new issue “would be at a 70 percent discount to Australian shares and a 60 percent discount to UK-listed shares.”

Nevertheless, Albanese acknowledged that market suspicions about Chinalco’s identity and intentions have persisted, and that FIRB’s attitude would be a key factor.

Historic Decision

The combined US$ 22 billion in investment proposals from Chinalco and other Chinese companies landed on the desks of FIRB and Swan over a mere two-week period. Never before had the regulators been handed such a heavy caseload.

It’s worth noting that FIRB has vetoed only one transaction in its 33-year history -- Royal Dutch Shell’s 2001 plan to acquire a 56 percent stake in Australia’s second-largest oil and gas company, Woodside.

But Tim Goldmith, a global mining expert at PricewaterhouseCoopers, told Caijing the Chinalco proposal differs from Shell’s, which was rejected because Australia feared losing control of the important gas assets on the country’s North West Shelf. “Concern about Chinalco’s deal is that (Australians) are uncertain about the intention of the deal, as Chinalco is a state-owned company,” said Goldmith.

Feeding that uncertainty was the appointment of Xiong’s predecessor, Xiao, to a state office post immediately after he left Chinalco this year. The move raised suspicions that the proposed Rio Tinto deal was backed by the Beijing government, said an industry analyst.

A former Chinese diplomat in Australia told Caijing that the Australian government is also concerned that the deal would give Chinalco two seats on the Rio Tinto board, which may give the Chinese company access to the mining company’s confidential information about iron ore price talks and influence pricing.

But Chinalco is responding to these doubts. “We have clarified many issues and improved the Australian side’s understanding of the deal,” said a Chinalco official.

Moving Upstream

Undeniably, rising demand for iron ore has led Chinese companies to seek access to upstream international resources. They’ve also sought contract advantages since, over the past five years, international prices for long-term ore contracts have consistently risen due to the monopoly status of the world’s three largest ore suppliers.

Valin, for example, has been seeking overseas ore assets for years.

At the same time, Chinese steel companies in general had considered any potential Fortescue investment as a possible means to break the monopoly of its larger rivals in the ore mining industry, in hopes of lowering international prices.

Speaking with Caijing, Valin Chairman Li Xiaowei noted that his company relies on imports for more than 50 percent, or some 9 million tons annually, of its ore demand. Valin is China’s ninth largest steelmaker with an annual capacity of 11 million tons. Li said the company wants to expand capacity to 30 million tons.

Before the economic downturn, Li said, Valin planned to pay up to 26 billion yuan for a 15 percent stake in Fortescue. But now, because like other global miners Fortescue is squeezed by declining commodity prices and debt, Valin will pay 6 billion yuan for up to 17.4 percent.

Indebted Miners

Fortescue has an annual capacity of 55 million tons and plans to expand to 120 million tons to compete with Rio Tinto and another rival, BHP Billiton. But it needs outside investors.

According to CLSA Securities, Fortescue’s debt had climbed to AU$ 3.1 billion by the end of 2008. The company’s current cash reserve is only AU$ 440 million.

Many Australian miners are in a similar situation. The mining industry’s slump since mid-2008 dragged Australia GDP down 0.5 percent in the fourth quarter 2008 -- the first decline in eight years – while the nation’s unemployment rate climbed to 5.2 percent in February.

Squeezed miners may have no other option that to accept investments from China. For instance, Rio Tinto, which has up to US$ 38 billion in debt, would use the Chinalco injection to make repayments and launch new projects.

In an interview with Caijing, Albanese said cooperating with Chinalco would give Rio Tinto investment and profit opportunities. “Otherwise, we will have to cut nearly 2,000 jobs in Australia,” he said.

Meanwhile, China Minmetals is waiting for a regulatory decision on its plan to invest in OZ Minerals, which owes AU$ 1.2 billion.

In Goldmith’s opinion, Australia should not reject investments from China because they would “meet Australia’s national interest.” And he expects Australian demand for Chinese investments to grow.

“There are few countries willing to provide investment now, and China is the major source,” Goldsmith said. He also noted that possible Chinese investments in other countries would do “serious harm to Australia’s mining industry.”

Full Article in Chinese: http://magazine.caijing.com.cn/2009-03-15/110121071.html