Chinalco-Rio Tinto deal may run into rough weather

14 February 2009

Chinalco's $19.5 billion investment deal with Rio Tinto may run into a storm with the Australian government, a shareholder of Rio and arch rival BHP Billiton both seething in anger. BHP is pulling out all stops to scuttle the deal in Canberra.

Yesterday, the debt ridden Australian miner, announced that it had closed a deal with China's biggest aluminum company, Chinalco, whereby the Chinese firm will take stakes worth $12.3 billion in several mines of Rio Tinto such as Escondida, the world's largest copper mine and a further $7.2 billion in convertible bonds issued by the miner.

The bonds will be converted into shares in seven years, which would raise Chinalco's stake in Rio from the present 9 per cent to 18 per cent. (See: Chinalco invests $19.5 billion in Rio Tinto to raise stake to 18 per cent)

The deal, which has to be approved by shareholders of both the companies and the Australian government, has already been undermined by politicians, industry experts and Rio Tinto's arch rival, BHP Billiton.

Opposition likely from Australian government: Just minutes before Rio Tinto made the announcement of the deal, the Australian government amended the foreign acquisitions and takeovers act of 1975, where it made convertible debt to be treated as equity with the change coming into effect immediately.

This means that Chinalco's stake will go up to 18 per cent immediately rather than the normal waiting period of seven years required for the convertible bonds to be converted into shares and hence will require regulatory approval as any foreign company investing in Australia requires regulatory approval if the stake crosses the threshold level of 14.99 per cent and 11.6 per cent if the investment is coming from a state owned company.