China’s stake in Rio Tinto gets all-clear

The Australian government has approved the Chinese acquisition of a stake in the mining group Rio Tinto, potentially throwing an obstacle in the path of BHP Billiton’s £70-billion bid for the company.

Chinalco, in partnership with the American mining group Alcoa, spent £7-billion to become Rio Tinto’s largest shareholder in February.

The acquisition of 12% of Rio Tinto’s London shares was the biggest single foreign investment made by a Chinese company to date and had to overcome serious political concerns in Canberra.

In a statement released this week the Australian Treasurer, Wayne Swan, said he would allow the Chinese company to buy as much as 14,99% of Rio Tinto’s London shares.

Rio Tinto has a dual listing in Sydney and a 14,99% stake in London would equate to around 11% in the entire group.

But he set two conditions; that Chinalco does not raise its stake above that level with-out fresh approval from the Australian government and that it will not seek to appoint a director to the Rio Tinto board as long as its stake remains below 15%.

It is debatable whether Chinalco will feel bound by the conditions.

In an interview in June Chinalco president Xiao Yaqing suggested that the company did not need Canberra’s approval because it had bought the shares in London.

Chinalco’s swoop on Rio Tinto was widely regarded as an attempt to block the BHP bid rather than a precursor to its own take­over attempt.

Beijing is said to fear that a merger of BHP and Rio Tinto would spark an increase in the price of raw materials.

A combined BHP and Rio Tinto would be worth £170-billion and control about 35% of the world’s traded iron ore.

BHP Billiton chief executive Marius Kloppers has played down the significance of the Chinese stake in Rio Tinto.

BHP made its hostile all-share offer conditional on only 50% acceptances, which means it is not necessarily reliant on the support of Chinalco.

But Stephen Bartrop, a resources analyst at Stock Resource in Sydney, told Bloomberg that the Chinese stake in Rio Tinto “creates uncertainty about whether or not BHP will get its deal over the line”.

The West has been wary about the growing financial clout of China, with governments scrutinising deals for political intent.

In the United States, a Chinese company was allowed to take over the personal computer business of IBM, but another, CNOOC, was blocked from buying oil company Unocal.

The Australian government recently blocked the Chinese steelmaker Shougang from buying a 20% stake in Perth-based iron ore producer Mount Gibson.

A Chinese bid for the Canadian aluminium group Noranda was also scuppered by political objections.

Swan said the conditions imposed upon Chinalco would be sufficient to protect Australia’s national interests.

BHP is awaiting regulatory approval before sending out its offer document. Washington has already given its approval while Europe is expected to rule by December 9.

Australian regulators will give their final verdict in October. —

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