MAC/20: Mines and Communities

Advancing China Fair? New perspectives on world's biggest mining deal

Published by MAC on 2009-03-16

According to leading "down under" newspaper, The Weekend Australian, China's government-backed Export-Import bank (Exim) is considering offering up to US$ 20 billion worth of favourable debt finance to Rio Tinto.

The offer would not necessarily be conditional on completion of the massive US$19.5 billion deal, already agreed between the UK-Australian company and China's state mining corporation Chinalco, which still has to be agreed by Rio's shareholders.

According to The Weekend Australian: "[S]uddenly there is a prospect that [Rio's] debt could be brought under control...[and its] capacity to fund growth [would be] actually better than it was before this whole mess started."

The so-called "growth" includes new "world-class" projects held by Rio Tinto in Peru (La Granja) , Mongolia (Oyu Tolgoi) and Guinea (bauxite).

But at least one Chinese commentator has expressed doubt that Chinalco will be able to afford the deal, unless it is supported by the regime and the country's banks. And Australia's foreign investment review board - which last week offered no objection to the Chinalco deal - could step in to torpedo additional Chinese funding, regarding it as a few billion dollars too close for political comfort.

Nor is this view confined to the Australian governrnent or some of Rio Tinto's own shareholders. Recently, the chairman of Minmetals, himself a delegate of China's top political advisory body, urged that the government reduce state funding for foreign mining companies, in order "to depoliticise overseas acquisitions."


Debt-laden Rio in ore at bucket of cash

Matthew Stevens

The Australian

14th March 2009

HIDDEN away in the documentation that establishes Rio Tinto's potentially umbilical relationship with China Inc is a clause which calls on new partner Chinalco to introduce the Anglo-Australian miner to "PRC financial institutions".

As it turns out, that clause was already redundant because Rio had been busy already making its own introductions in Beijing.

On the same day that Rio confirmed its $US19.5 billion ($30 billion) "pioneering strategic partnership", management received a letter from the Export-Import Bank of China, or Exim Bank, celebrating the deal proposed and confirming the bank's ability to provide debt finance.

The first thing to note is that the funding deal being offered here is quite separate to the $US19.5 billion Chinalco will require to complete its landmark alliance. This is new cash.

The second is that, for all this deal represents what would seem an inevitable expansion of Rio's relationship with China, this is an arrangement that could complicate the federal Government's review of the miner's engagement with China Inc.

That Rio's alliance with China Inc has expanded to include banking support will only increase the sensitivity of the Rudd Government's deliberations on the Chinalco deal.

It has been speculated over recent weeks that China's state-owned international development banks would be willing to contribute something like $US5 billion to support Rio's growth.
For once, speculation falls short of reality.

While no numbers are specified in Exim Bank's "letter of financing support", which has been obtained by The Weekend Australian, it is understood that discussions have focused on numbers up to $US20 billion.

To put the seriousness of Rio's discussions with Exim Bank into some sort of context, so far this financial year the bank has delivered loans of nearly $US30 billion to Chinese and international clients. Which means only that the deal under consideration represents a very serious step-up in the sorts of numbers Exim Bank has been able to talk about in the past.

What is very clear from the correspondence between Exim Bank and Rio chief financial officer Guy Elliott is that the offer of financing is predicated exclusively on a successful conclusion of the Chinalco deal. The letter notes, for example, that the support is offered to "further facilitate the co-operation between Chinalco and Rio Tinto".

But it appears that access to the facility does not depend on Chinalco's involvement and, further, it could be used to support several of Rio's big-ticket growth projects as long as they involve Chinese partners.

Exim Bank says it is prepared to provide a long-term facility which would "fund future joint venture projects with Chinalco and/or other eligible Chinese companies".

Doubtless, this is a development which will interest the Foreign Investment Review Board as it continues its very private deliberations on Rio's Chinalco solution.

Rio's "pioneering" solution to a $US39 billion debt crisis of its own making has to propose selling non-controlling chunks of Australian operations to Chinalco for $US12.3 billion while delivering China's national minerals champion with $7.2 billion of high-yielding convertible notes. On conversion, those notes would see Chinalco own 18 per cent of Rio Tinto.

Rio's arrangement has caused headaches in London and heartaches in Australia.

A rowdy cohort of Rio's British shareholders are unhappy that they have not been given a chance to share in what they regard as a rights issue while Australians seem more worried about the potential shift of control of our sovereign assets to what is, in essence, a commercial conduit of China's Government.

And that might well explain why, while China Exim Bank specifically authorised the release of its "financing support letter" in support of the transaction, it has taken just more than a month for this new avenue of engagement to see the public light of day.

Not that Exim Bank's support is perceived as anything but good news inside Rio Tinto. From the announcement of February 12, Rio chief executive Tom Albanese has been conditioning the market to expect the sluice gates of Chinese capital to open once the Chinalco deal was complete.

This letter says simply that Albanese knew more than he was saying and that, in reality, he had already all but bagged profound licks of China's foreign exchange reserves should Rio want to call on them.

And that is a pretty good space to be in, if you are Albanese. I mean, it is not three months since his world looked like falling apart as global demand for minerals and metals tanked, BHP Billiton dropped its takeover offer and suddenly Rio Tinto looked like being called to account for the debt-funded $US38 billion takeover of Alcan.

Some $US8.9 billion of Rio Tinto's debt is due in October while another $US10 billion is due for repayment or extension in October 2010.

There was a fear the banks would not roll and that Rio would need to repay. That Rio Tinto would be able to meet those calls was not really a question. But the damage to its medium-term outlook would be extreme given it would be unable to fund a $US20-$US30 billion project pipeline.

Then came Chinalco and Exim Bank. And suddenly there is a prospect that debt could be brought under control while the group's capacity to fund growth is actually better than it was before this whole mess started.

Why better? Well, because it appears almost certain that Exim Bank's line of credit would be available at very competitive rates. Certainly, the cost of borrowing would be less than just about anything else Rio could access, an insider observed yesterday.

That Rio, and Australia for that matter, has need of Exim Bank's cash cannot be doubted.

But for its debt issues, Rio Tinto would already be talking up its desire to kick-start a new round of capital investment at the first signs of life in global minerals and metals markets. It has plans to spend $US10 billion on iron ore development in the Pilbara, at least $US2.5 billion on copper in Peru and the same amount again, at least, on copper in Mongolia and, given a more stable political environment, up to $US18 billion on iron ore in Guinea.

What's more, the Exim Bank deal opens up new frontiers for expansion given the facility would be available to finance new opportunities in China.

The idea of project development inside China is something Albanese has been talking up for a good 18 months and this concert of alliances with China Inc could transform potential to reality.

The biggest hurdle here, though, remains FIRB and whether the Rudd Government is prepared to endorse Rio's new intimacy with China. Chinalco is a state-owned enterprise of the PRC while, if anything, Exim Bank is even more certainly an expression of government policy.

Rio's position is that as long as it still controls the farm, then Australia should not worry too much about what China owns of it. The company will argue that it retains control of everything involved in the Chinalco deal and that the funding arrangements which support the expansion of existing assets or the construction of new ones should not change the nature of FIRB's deliberations on the Chinalco deal.

But it might not be that simple. Given how it stands, Rio's rescue deal will see Chinalco own 15 per cent of Hamersley Iron. But Rio has plans to increase its Pilbara iron ore production from 220 million tonnes per annum to 320mtpa. That will cost maybe $US10 billion and much of that will be debt. If that debt is provided by Exim Bank, does that effectively increase the level of control China Inc is able to express over Rio's assets?

The answer to that, according to Rio Tinto, is pretty simple: no. Whether FIRB sees it that way, well, time will tell.


Guest column: Is the time right for Chinalco to buy into Rio?

By Chong Dahai

Interfax China Metals and Mining

13th March 2009

[In this week's Interfax metals guest column, Chong Dahai, an industry analyst with Xinhua news agency, discusses his views regarding Chinalco's recent move to increase its stake in Rio Tinto, one of the world's top iron ore miners, in the midst of a global economic slump. (Translated from the original Chinese by Ginger Ding)]

From a short-term perspective, now is not a good time for Chinalco's Rio Tinto stake purchase, however, an opportunity to acquire such quality assets seldom rears its head.
It came as a surprise to the market when Chinalco entered into the agreement on Feb. 12, 2009 to inject $19.5 billion to increase its stake in Rio. Many were unsure whether the market had really bottomed out and if the timing was right for such a stake acquisition.

Given Chinalco's current financial status and Rio's share price, Chinalco's move to buy Rio shares at a 124 percent premium shows its determination. However, Chinalco is also well aware that it will face difficult times ahead due to tight finances, reduced profitability in 2009, and a possible long-term commodity market slump.

In the last quarter of 2008, China's aluminum smelters all posted losses due to the sharp drops in aluminum and alumina prices, and Chinalco was no exception. Its listed subsidiary Chalco racked up losses of RMB 2.06 billion ($301.13 million) in October and November 2008, while December's figure is yet to be released.

Previous overseas projects have also cost Chinalco dearly in recent years, including a $2 billion Peru Copper takeover in August 2007, a 12 percent Rio stake for $14 billion in February 2008, and its aluminum project in Saudi Arabia. If the government and banks do not provide support this time, Chinalco may not be able to afford the Rio acquisition.

What's more, the Rio purchase will not bring rewards in the near term for Chinalco, due to the economic downturn and uncertainties over when a turnaround will occur. In addition, Chinalco's previous 12 percent stake purchase in Rio has plunged in value, by around two-thirds since the purchase date.

BHP Billiton, another top global resource company, had been keen to take over Rio since November 2007, though it eventually withdrew its offer, following Chinalco's 12 percent purchase and the outbreak of the global financial crisis. But recently, BHP's CEO said there is still interest in Rio, if the latter is forced to sell some assets to reduce its burden of debt.

Other companies could also be lining up to buy into Rio. Rio has already sold its Argentine potash and Brazilian iron ore assets to Vale, and it is in talks with other companies such as Mitsui & Co. Ltd. for possible stake sales. Mitsui holds stakes in many high-quality ore assets including the Yandi, Newman and Robe River mines, and is unlikely to overlook the chance to acquire Rio assets.

In other words, if Chinalco procrastinates further until the cost of the Rio purchase reaches its lowest point, it will be less likely to succeed in buying a stake.

It is a good opportunity for Chinalco to further buy into Rio, because I believe Rio would not normally open up its quality assets, like the Hamersley Iron Ore Project, to outside investment unless it debts spiral out of control, which is the case and is partly due to its Alcan Inc. acquisition. Rio took on board company debts of approximately $40 billion.

Though Chinese companies have been acquiring more deposits in recent years, they are still in need of quality resource assets. Most of the assets previously bought are low grade, high in impurities, and in remote locations.

Whether Chinalco will succeed in its additional Rio share purchase is still subject to Rio shareholder and government regulatory approvals.

The above is a personal opinion piece by the author. Its publication in no way implies that Interfax shares the views expressed in the article.


China urged to lessen state funds for mining-paper

Reuters

3rd March 2009

BEIJING - China should lower its reliance on state capital for overseas mining investments to lessen concerns abroad about government-backed acquisitions, an official newspaper said on Tuesday, citing a top company official.

Concerns over Chinese acquisitions have been triggered by state-owned companies of the world's biggest mineral and metals consumer targetting overseas mining sectors.

"Establish large-sized industry funds to agglomerate relatively abundant state and private capital as a complement to relatively weak mining investment capital of domestic mining firms," the Shanghai Securities News quoted Zhou Zhongshu, chairman of Chinese trading firm Minmetals, as saying.

That could "change the current situation that domestic bank loans are the only financing channel for Chinese companies developing overseas mining resources...to depoliticise overseas acquisitions," Zhou, a delegate of China's top political advisory body, said in a proposal.

"(The country) could establish a national "metals mining development fund", which could be combined with the country's forex reserves," said Zhou, who heads the company which bought Australia's OZ Minerals Ltd,, the world's No. 2 zinc miner, for $1.7 billion last month.

Aluminum Corp of China (Chinalco) has purchased assets in Anglo-Australian miner Rio Tinto Ltd/Plc and Chinese steel mill Hunan Valin Iron and Steel bought into Fortescue Metals Group in February.

Analysts have questioned the Australian government's willingness to let Chinese state-owned firms take big stakes in local miners at a time when low commodity prices have left companies vulnerable to overseas predators armed with state funds.

(Reporting by Alfred Cang, Editing by Jacqueline Wong)

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