Chinalco speaks out

Chinalco defends planned Rio deal

By Peter Smith in Sydney and William MacNamara in London

Published: May 3 2009 18:09 | Last updated: May 3 2009 18:09

A senior official of Chinese metals group Chinalco has spoken out against suggested changes to its planned $19.5bn investment in Rio Tinto, despite growing signs that concessions may be needed to secure the support of Rio’s other shareholders.

In an interview with the Financial Times, Wang Wenfu, president of Chinalco Overseas Holdings, dismissed demands by some Rio shareholders to be given the same opportunity as Chinalco to buy convertible bonds. “This investment is a package. It is a result of two months of very intensive negotiations. It cannot be viewed separately,” he said.

Chinalco wants to invest $7.3bn in convertible bonds that would increase its equity stake in Rio from 9 to 18 per cent. It is also planning to pay Rio $12.3bn for minority stakes in some of the mining group’s best operations.

Opponents of the deal say it ignores existing shareholders’ pre-emptive rights to refinance the company without their stakes being diluted. But Mr Wang said: “We respect the [pre-emption] rights of shareholders. Shareholders should have the right to help their company and Rio management has to assess the situation and it is their judgment that this transaction is in the best interest of all shareholders.”

The merits of the proposed Rio/Chinalco deal may also have been undermined by a resurgence in the shares of the Anglo-Australian mining group and higher commodity prices since the deal was struck in February.

The rise in Rio’s share price, which closed in Australia on Friday at A$64.18 ($46.85), is already higher than the $45 strike price for one of the two tranches of convertible bonds. The second tranche is priced at $60.

Mr Wang said markets were volatile in the short term but the Chinese mining group offered Rio certainty and a package of solutions that would address its debt issues, future financing needs and requirement for access to the Chinese resources sector.

“I am not sure the current market is sustainable. We have seen some recoveries that don’t continue,” he said.

Against that background, Rio has stepped up consultation with Chinalco and its other shareholders in recent weeks to explore forms of compromise.

The Chinalco deal must also win the backing of Australia’s Foreign Investment Review Board, which has until mid-June to complete an assessment before Canberra provides a final ruling.

Mr Wang said it was understandable that the regulator was taking its time assessing the deal, given the size and nature of the investment, but that he was confident it would be passed.

Malcolm Turnbull, the former Goldman Sachs executive who last year became leader of Australia’s federal opposition, weighed into the debate last week when he urged Canberra to block the deal because it failed to meet Australia’s national interest considerations.

However, Mr Wang said the Chinalco investment into Rio would be a “win win” for Australia and China.