Rio Declines on Concern Chinalco Deal May Not Proceed

March 18 (Bloomberg) -- Rio Tinto Group, the world’s third- largest mining company, fell the most in three months in Sydney trading on concern Aluminum Corp. of China’s $19.5 billion investment may not be approved by the Australian government. Rio fell as much as 9.7 percent to A$46.96 as of 2:41 p.m. in Sydney, the biggest decline since Dec. 4. Goldman Sachs JBWere Pty Co. analysts, led by Neil Goodwill, said the deal with Chinalco, as state-owned Aluminum Corp. is known, may not go ahead and pointed to “problematic” debt levels at the London-based company. The investment bank cut its rating to “sell” from “hold” in a report dated yesterday. “There is a risk that the Chinalco deal isn’t approved,” the analysts wrote. “As much as we don’t like the Chinalco deal, if it’s not approved now (after being supported by management and the board), and without an attractive alternative, we would see this as negative for the share price.” Australian lawmakers may today vote for an inquiry into foreign investment laws amid a backlash from politicians and shareholders. The Senate will probe acquisitions by state-owned companies and sovereign wealth funds and the effect on competition, according to a motion scheduled for 3:30 p.m. Canberra time today from opposition Senator Barnaby Joyce. Labor government senators will support Joyce’s call for the inquiry, Greens Party Leader Bob Brown, said yesterday. An investigation by the Senate Economics Committee can call executives from companies, including Rio and Chinalco, to give evidence and will make recommendations in June. The government doesn’t have to accept the recommendations. Chinalco Vice President Lu Youqing and Rio spokeswoman Amanda Buckley couldn’t be immediately reached for comment. ‘Overblown’ The cost of protecting Rio’s bonds from default this year is “overblown” as investors overestimate risks faced by the world’s third-largest mining company, BNP Paribas SA said today. Investors should sell Rio’s December 2009 credit-default swaps since the company faces “no material refinancing risk” this year, Hong Kong-based analyst Winston Herrera said in a research note to clients. BNP quotes the cost to protect Rio’s debt from default for one year at 730 basis points, the same as the price for five-year credit-default swaps. Rio will have an estimated $16.2 billion at hand, including $6 billon in free cash flows from its businesses, to help pay back $10 billion of short-term debt this year, Herrera said. Australia’s Foreign Investment Review Board this week extended a probe into the Rio deal by as many as 90 days. ‘Off the Table’ “Whatever way you look at it, we’ve got almost no decision for three months,” said Michael McCormick, who helps manage more than A$100 million at Leyland Private Asset Management in Sydney. “Anyone who is in Rio, and they might have made a little bit of money in the last couple of months, is probably happy to take it off the table.” Opposition to Chinese investment globally helped block Cnooc Ltd.’s $18.5 billion bid for U.S.-based Unocal Corp. and Haier Group Corp.’s offer for U.S. appliance maker Maytag Corp. in 2005. Some 78 percent of Australians oppose investment in the nation by Chinese government-controlled businesses, according to a poll of 1,001 people by the Sydney-based Lowy Institute in September. Rio has about $38 billion in debt, Goldman said. Separately, the securities firm forecast aluminum losses for Rio. “The outlook for aluminum is weak and we are forecasting losses in this division for the next two years,” the bank said. To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net.