A Senate inquiry may examine the $US 19.5 billion Chinalco-Rio Tinto deal that’s attracting more and more opposition in political and business circles as reports circulate that there could be second thoughts inside Rio.
There was no sign of second doubts in Rio’s 2008 annual report, released yesterday with all the commentary strongly in favour of the deal.
The Senate economics committee will be asked to investigate whether current laws are adequate at protecting the national interest.
Greens Party Leader, Senator Bob Brown’s push for the inquiry follows grandstanding from National Party Senator, Barnaby Joyce, who has started a “Keep Australia Australian” advertisement campaign, opposing the Rio deal and China Minmetals Group’s plan to buy OZ Minerals Ltd.
If the Minmetals purchase of OZ Minerals is blocked, the struggling Australian miner will almost certainly collapse.
But London reports claimed that the strong opposition from some big UK shareholders (led by Legal And General) had started the review.
The London Daily Telegraph said the Rio would use the extension by the Australian Foreign Investment Review Board on Monday to review the terms of the deal.
Australian Foundation Investment Co, the largest Australian shareholder in the Australian and London-based shares of Rio, slammed the deal as it stands Monday, saying it gave Chinalco and China a big role in Rio’s management and would see control change without a premium being paid to existing shareholders.
AFI spoke of its "deep concern" about the deal as it stands.
Then the report appeared in the London Daily Telegraph, in its Tuesday edition, which quoted unnamed sources as saying Rio would use the extra 90 days to conduct a review of both the terms and whether it should raise the approval threshold from 50% to 75% when the deal is put to a shareholder vote.
Some UK Rio shareholders have said they would prefer to vote on a special resolution on the Chinalco deal as that would require 75% approval, while an ordinary resolution requires 50%.
Under the deal government-owned Chinalco would pay $US12.3 billion for stakes in debt-saddled Rio’s key iron ore, copper and aluminum assets and $US7.3 billion for convertible notes that could double its equity stake in Rio to 18%, and effective control.
In its annual report yesterday Rio said the proposed transaction with Chinalco "will strengthen our balance sheet on terms that add value to the Group and increase our flexibility to grow as markets recover. It will strengthen Rio Tinto’s position in the industry during a period in which China’s importance in the global economy is growing rapidly."
The company’s outlook for this year and beyond was very circumspect and started: "Subdued conditions are expected in early 2009; Chinese investment is expected to start gaining strength in the second half of 2009; marginal producers are expected to curtail supply".
"Although the current slowdown has been much more dramatic than anticipated, we expect China’s long term growth to continue as a major driver of commodities demand," Rio said in the annual report.
"China has been temporarily hit by the combined effect of the Western world slowdown and a correction in its housing market, partly a function of the tightening of monetary policy introduced in 2007 to damp down rising inflationary pressures.
"When global economic activity recovers we could see metals and minerals demand pick up rapidly, driven by the requirement to rebuild stocks, at a time when supply is constrained by the cutbacks that occurred during the downturn and by the challenges of delivering new supply, often from new sources.
"China particularly may surprise the market.
"It is the rate of deceleration and acceleration of the Chinese economy which drives metal demand and prices, given its major share of total global demand.
"Just as China decelerated sharply, with a strong impact on metals demand, it will also work powerfully in the upswing.
"We believe the fundamentals of the Chinese market, and other fast growing markets like India, remain intact and the industry’s long term prospects remain positive.
"While activity is likely to be relatively muted in the first half of this year, Chinese investment is expected to start gaining strength in the second half of 2009 with the support of substantial domestic savings and a shift in government policy towards promoting growth objectives including expansion of transport infrastructure and housing.
"While government spending will support Chinese GDP growth, it is expected nevertheless to slow further in 2009."
It sounds like Rio directors have well and truly hitched everything to China; investment-wise and operationally.
Rio shares drifted lower in trading yesterday and then bounced to end up around 2.5% at $52.01.
