Don’t reject Chinalco’s bid for bogus reasons

Rio Tinto, the mining company with almost as many holes in its balance sheet as holes in the ground, upset some Australians when it established its headquarters in London following the 1995 union of RTZ and CRA. Now, rumblings Down Under suggest the Anglo-Australian mining giant is about to make an even more humiliating move: to Zhongnanhai, home of China’s Communist party. The swashbuckling decision by Chinalco, China’s state-owned metals group, to lavish $19.5bn (€15.3bn, £13.5bn) on debt-burdened Rio has not provoked quite the nationalistic backlash set off by CNOOC’s aborted takeover of US oil company Unocal. That is partly because Chinalco would end up with just 18 per cent of Rio, and partly because – in these straitened times – it is impolite to question the kindness of strangers bearing billions of dollars in cash. Still, Chinalco’s offer to buy $7.2bn worth of convertible bonds and to spend a further $12.3bn on minority stakes in Rio treasure – including iron ore, copper and bauxite mines – has been greeted by what one Chinalco advocate describes as “parochialism and low-level xenophobia”. Senator Barnaby Joyce of the opposition National party said: “The Chinese government involvement, via their vehicle Chinalco, is not a one-off.” Suggesting Chinalco’s intentions were less than honourable, he added: “If they own the resources, they will just dig them up and cart them away.” Broadly, there are two possible objections to Rio accepting Chinalco’s largesse. The first, that it has fallen for Beijing’s plot to get low-cost minerals, is largely spurious. The second, that Rio is compounding previous managerial errors by betraying its own shareholders, deserves a hearing. The danger is that the two are conflated. At first glance, the hand of Beijing in Chinalco’s Australian adventure is not hard to detect. Chinalco got its shopping money from the China Development Bank . Its offer is part of a pattern of grabbing raw materials around the world. This month alone, Beijing-based Minmetals launched a A$2.6bn recommended bid for Oz Minerals, another down-on-its-luck Australian miner. Beijing agreed to provide Petrobras, Brazil’s state oil company, with some $10bn in loans in return for up to 160,000 barrels of crude a day. China Development Bank signed a $25bn financing deal with Rosneft, Russia’s state-controlled oil company, in return for two decades’ supply of east Siberian crude. As if more evidence were needed that Chinalco was answering to a higher cause, days after it announced the Rio deal, its chairman, Xiao Yaqing, landed a top government job. But to say there is state involvement is not the same as imagining a monolithic apparatus planning world domination. In any case, the west, whose banks, carmakers and god-knows-what else are underwritten by the state, is not in an ideal position to lecture others. If China wants to use its trade surplus to secure mineral resources, one response might be: so what? But Chinese companies, even state-owned ones, are as likely to be engaged in cut-throat competition as in cosy cartels or state-sponsored carve-ups. That undermines the idea that Chinalco, an aluminium maker with no need of iron ore, would seek to persuade Rio to sell cheaply to China Inc. Even if Chinalco were in a position to influence price negotiations – and with just two board members that seems doubtful – it is more likely to try to maximise prices for its own sake than to minimise them for China’s good. Evidence that China’s forays abroad have been led by companies, and not orchestrated by an all-knowing state, is plentiful. Chinese companies often compete for the same asset. Both Shanghai Automotive and Nanjing Auto bid for Rover when the UK carmaker went chassis-up. Fears that Beijing is making a huge asset grab while the world reels from financial crisis also ignore the fact that foreign adventures are out of vogue in China. State institutions that invested in sinking foreign banks have faced public outrage for squandering national resources. A more plausible reason for opposing Chinalco’s offer is that Rio’s shareholders deserve better. UK institutional investors are furious they were not offered the chance to participate in a rights issue. They have lost faith in a management that rejected a hostile approach by BHP Billiton shortly after splashing out $44bn – in cash – for Alcan. That particular rush of blood to the brain leaves Rio owing two tranches of debt totalling $20bn, a sum conveniently provided by Chinalco. Even then, the board was divided; Jim Leng, chairman-designate, quit in protest. Rio says it could have raised $10bn from a rights issue. But that would have left it needing more, forcing it to sell prized assets at firesale prices. Chinalco’s bid, it argues, is generously priced and offers access to Chinese cash and minerals, claims the deal’s opponents dispute. Angry Rio shareholders see little in it for them, save dilution. The Association of British Insurers, which represents institutional investors owning roughly a fifth of Rio, says Chinalco should instead offer to underwrite a rights issue. That would prove its good faith, it says. Investors have every right to be wary. If Rio’s accident-prone board is recommending the deal, there must be a prima facie case for doing something else. But if shareholders reject Chinalco’s offer, they should make clear they mistrust the judgment of Rio’s management, not the motives of China. Copyright The Financial Times Limited 2009