China eyes long-term needs with Chinalco's Rio move

BEIJING (Reuters) - A near-$20 billion (13.8 billion pound) investment by China’s top state-owned aluminium producer in miner Rio Tinto and some of its best assets shows how Beijing can use the commodities downturn to buy good assets, and raise the game of China Inc.

Chinalco President Xiao Yaqing (L) stands next to with Paul Skinner, Chairman of Rio Tinto, for photographers during a meeting in London February 12, 2009. REUTERS/Stephen Hird

While China has a long-term strategic interest in securing resources supplies, its big banks are among the most likely to buy minority stakes in foreign counterparts, analysts said, as Western peers bleed red from the global financial crisis.

Industrial and Commercial Bank of China's 2007 acquisition of a stake in South Africa's Standard Bank SBKJ.J neatly combined China's cash with its interest in the resource sector.

Prime resource assets that lack financing, for instance in the former Soviet Union, may also be among the opportunistic targets that come up in the months ahead.

Aluminium Corp of China's (Chinalco) buy into Rio Tinto RIO.LRIO.AX may set a new standard for Chinese state-owned companies investing globally, and convince Beijing policy makers that long-coddled domestic firms can, in fact, develop the skills and judgement to compete in the multinational arena.

Xiao Yaqing, Chinalco’s president, has combined the decisiveness of a private company executive with a state-owned enterprise boss’s ability to tap government loans and approval.

“Chinalco was China’s national champion, now it’s their global champion,” said Michael Komesaroff, consultant at Urandaline investments.

“In the global downturn, China will restructure more industries around national champions. One of the incentives for the winners is they will get to do deals like Chinalco does ... That’s a tremendous incentive,” he said.

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China’s metals firms, and its government, are keenly aware the country has a long-term strategic need for imported resources that outweighs the recent drop in commodity prices that has forced many Western firms to cancel or delay investments.

Chinalco first bought into Rio last year in a lightning strike on 12 percent of its London-listed shares for $14 billion -- a move that complicated rival BHP Billiton's BLT.LBHP.AX hostile $66 billion bid for Rio.

As commodity markets crumbled late last year, BHP walked away from its bid leaving Rio heavily burdened with debts from its earlier purchase of Canadian group Alcan.

That left an opening for another Chinalco strike, and it was announced on Thursday that the Chinese group would spend $7.2 billion on bonds convertible to Rio shares, and $12.3 billion on shares in Rio copper, aluminium and iron ore projects.

Komesaroff said the deal was “innovative, broad-ranging and with a vision to it.”

China’s Communist Party mouthpiece Guangming Daily said the move showed “the bravery and courage of Chinese enterprises” and would boost their confidence.


Chinese firms were latecomers in investing overseas, and high metals prices often limited them to the more risky, more marginal deposits.

For companies eying a Chinese ‘white knight’ -- a full-blown rescue or a cash injection to rescue it from distress -- there is also a risk of political baggage.

Australia has fretted over a Chinese foothold in its resource-rich lands, and U.S. politicians thwarted a 2005 bid by China's CNOOC 0883.HKCEO.N for California-based Unocal.

The commodity price slump, however, has changed the resources M&A landscape, with better quality assets available at lower prices and rival multinationals less able to finance competing bids for them.

But Chinalco’s acquisition of minority stakes in some of Rio’s crown jewels -- such as the Hamersley iron ore deposit in western Australia and Escondida, the world’s largest copper mine in Chile -- shows the Chinese are still learning.

Chinalco will not operate any of the assets, reflecting a long-held reluctance to engage with the complications of Western labour unions, environmental laws and indigenous rights issues, said Liu Yikang, deputy secretary general of the China Mining Association.

Editing by Ian Geoghegan