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China offers Rio Tinto $20-billion loan if Chinalco deal is passed news
14 March 2009

China's hunger for minerals is scaling new heights in 2009; to get the Chinalco deal passed by a hesitant Australian government and angry shareholders, the Exim Bank of China has offered debt-riden Rio Tinto loans potentially worth $20-billion to develop future mining projects in Australia, China and else where in the world.

However, the loan is contingent on the state-owned China Aluminium-Rio Tinto deal being passed by the Australian regulators (See: Rio Tinto shareholders continue to oppose Chinalco deal).

The $20 billion would be made available to Rio Tinto as soft loans to develop mining projects in Australia, China and other parts of the world, which it would not be able to do under the current tight credit market.

Last month, Beijing made its biggest investment ever in a foreign company, when state-owned Aluminium Corporation of China (Chinalco) offered to invest $19.5 billion into troubled mining giant Rio Tinto, where the Chinese company's holding in Rio would increase from an existing 9 per cent to 18 per cent. (See: Chinalco invests $19.5 billion in Rio Tinto to raise stake to 18 per cent)

But the deal has run into a storm with the Australian government, shareholders of Rio and arch rival BHP Billiton both seething in anger with BHP pulling out all stops to scuttle the deal in Canberra.

Just minutes before Rio Tinto announced the deal, the Australian government amended the foreign acquisitions and takeovers act of 1975, making convertible debt to be treated as equity with the change coming into effect immediately.

Apart from the government, many investors and shareholders are furious and voiced their opposition to the deal and said they would not let the deal go through since the miner had rejected larger rival BHP Billiton's bid of over $147 billion (See: BHP Billiton raises offer for Rio Tinto to $147 billion) while selling some of its best assets to Chinalco at bottom of the market prices in order to pay off its huge debt of $39.1 billion incurred in the Alcan acquisition.

The secretary-general of the China Iron and Steel Association, Shan Shanghua told Bloomberg in an interview that the duopoly enjoyed by the Australians in supplying iron ore will be broken by China over a period of time and the investment of $19.5 billion might be too early to affect the 2009 price negotiations.

Under the dual listing of Rio in the UK and Australia, the British and Australian arms retain separate legal identities but are treated as if they are one combined entity, with the shareholders of both companies having a common economic interest in all the assets.

There is considerable dissatisfaction with the deal in both Rio companies, but the focus is different in each case.

The main concern is that Rio proposes to sell-off significant slabs off its prime assets at the bottom of the cycle to pay for the acquisition of lower quality assets, and is doing so at prices that are much lower than would have been possible only months earlier, resulting in value leakage.

For that reason, rather than the principle of pre-emption rights, many local investors also favour a rights issue by Rio, and further asset sales, rather than the proposed Chinalco deal.

There is also concern locally that the multitude of contractual entitlements and rights envisaged in the Chinalco deal would give the Chinese group much greater influence over Rio than implied by the percentage holding in Rio.

On Thursday, the Greens party, which vehemently opposes the Rio Tinto-Chinalco deal, had its motion of sinking the deal, defeated in the Australian parliament. (See: Greens see red in Rio Tinto-Chinalco deal)

China is trying to park a big chunk of its growing wealth in the world's natural resources that would fuel its economic growth and the changes in foreign investment rules announced by Australia after a decade-long minerals boom, only helped to drive down Chinese demand for Australian resources.

With operations in Australia, North America, South America, Asia, Europe and southern Africa, Rio Tinto prospects and processes mineral resources, including aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt, talc) and iron ore.

Deals involving Chineses acquirers is continuing and, in fact, rising in 2009 with apart from the controversial $19.5-billion Chinalco-Rio Tinto deal, China Minmetal's $2.5-billion bid for Oz Minerals and Hunan Valin's $770 million investment in Fortescue. (See: China invests heavily in Australian miner-Fortescue)

It is now developing a massive copper deposit in neighbouring war-torn Taliban region of Afghanistan, considered as the most dangerous place in the world. In November 2007, the Karzai government in Afghanistan in collaboration with NATO forces had auctioned the huge Aynak copper deposit under the US Agency for International Development (USAID) plan and arbitrarily awarded the mining rights to Chinese state enterprise, China Metallurgical Group, for $3.5 billion.(See: China to mine copper in Afghanistan)

With the building of the Qinghai-Tibet rail line in 2006, the Chinese have started to exploit the abundant mineral wealth of Tibet also, which has come under increased opposition from Tibetans.

But with China having invested billions of dollars in mining in Tibet, little consideration will be given to the Tibetan protests, who consider the mountains where mining is carried out, to be sacred.

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China offers Rio Tinto $20-billion loan if Chinalco deal is passed