Rio Pleads For A Rethink On China

The Age

Friday October 3, 2008

Barry FitzGerald, Resources Editor

RIO Tinto has moved to inject some competitive tension into BHP Billiton's hostile $126 billion takeover bid by urging the Australian Government to welcome more investment from China in the sector.

The call by Rio managing director Tom Albanese follows recent government bans and limitations on Chinese investment in the iron ore sector, which have raised the prospect that a Chinese counter to the BHP offer would not gain clearance from Canberra.

The Government recently gave the state-owned Chinese aluminium group Chinalco permission to increase its Rio stake from 9% to 11% if it wished.

But when taken with other foreign investment decisions, the implication was that approval to move beyond 14.9% might not be forthcoming. While that suits BHP with its bid, Rio would have preferred the potential for a Chinalco-led Chinese challenge to BHP's bid to have remained afoot.

Speaking to the Melbourne Mining Club, Mr Albanese said an "alarmist" view was circulating in business and political circles that Australia had much to fear from consolidation of the resources circle into the hands of a few Chinese, Brazilian and Russian mega-companies.

He said the argument was that unless foreign investment in the sector was restricted, the Australian resources industry would be weakened and at risk of being stripped of "capability and relevance".

"For a trading nation such as Australia to accept this misleading view of the world would be to risk serious economic damage," Mr Albanese said. While Australia was resource rich, it was capital poor.

He said the Government needed to resist the "siren's song of protectionism" when it came to foreign investment in mining assets. And if anything, Australia should consider being more flexible in accommodating the "needs" of its foreign customers, including their taking stakes in existing and new producers.

BHP has so far had an open run at Rio with its 3.4-for-1 takeover bid. The lack of a competing offer is one reason why Rio continues to trade at an 18% discount to the proposed offer, which is conditional on European Commission clearance.

Meanwhile, Mr Albanese said the US financial crisis had not affected Rio's staunch rejection of the BHP bid. He said it was a (bid) proposal that was "manifestly short on value".

"The proposal still significantly undervalues us and fails to recognise the underlying value of Rio's quality assets and prospects," he said. Rio had the resilience to "weather this sort of storm easily on our own".

Mr Albanese said he felt the "real impact of the financial panic of this week is oversold and we will see some return to sanity". But China's economic growth was set to slow.

A modest but "clearly discernible deceleration in Chinese growth" was under way. Rio expected China's gross domestic product growth would fall from nearly 12% in 2007 to about 10% this year and 9% in 2009.

"I believe that the China phenomenon is sustainable, and will outlast the cyclical impacts of the mature and troubled financial centres," Mr Albanese said.

BHP and Rio weakened in yesterday's market. BHP fell $1.08, or 3.29%, to $31.67 while Rio was off $3.75, or 3.9%, to $91.25, the equivalent of 2.88 BHP shares. At BHP's closing price, its offer for Rio was valued at $107.67 a share or an 18% premium to Rio's market price.

The reporter owns BHP shares.

KEY POINTS

The call follows Canberra bans and limits on Chinese investment in the iron ore sector.

Rio would have preferred the potential for a Chinalco-led challenge.

© 2008 The Age

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