Ladies and gentlemen, believe me when I say that I would like to be proven wrong most of the time. While many prefer to say "I told you so," I long ago figured that being pessimistic and cynical has its drawbacks. You do not go wrong in many instances expecting the worst of people--I am admittedly a glass half full sort, but still... A month or so ago, your correspondent voiced doubts over whether (PRC-owned) Chinalco's bid for 18% of Aussie mining giant Rio Tinto would be consummated with ease. Many said that existing shareholders would not welcome the share dilution which would happen if it pushed through. True enough; this has been a major source of problems in making the deal happen. However, I also pointed out the ugly face of blatant protectionism as a possible hindrance. Bang on schedule, I present you protectionism's unvarnished nastiness as Rio's stock takes a beating from the inevitable delay or even scuttling of this deal. From the Syndey Morning Herald:
Rio Tinto shares are under pressure amid investor uncertainty about the future of the $US19.5 billion ($29.5 billion) investment deal by Chinalco. Rio Tinto shares ended the day down $4.51, or 8.7%, at $47.50, while rival BHP Billiton lost 82 cents, or 2.6%, to $31.08.There is nothing much for me to add here other than say beggars can't be choosers given Rio's decrepit finances from its costly acquisition near the height of the commodity bubble. There is a good chance that commodity prices will rise significantly pretty soon, but for now, Rio Tinto must bite the bullet. What we have here is as another discriminatory arrangement. Just as the US-Mexico spat concerns a quite frankly ridiculous conviction of "driving while Mexican," this one is of "investing while Chinese." There is no doubting that the commanding heights in China are party-controlled; however, this does not mean that a measly 18% stake will turn Rio into a Party satellite or anything of that sort. I have long championed Chinese investment outside of (declining) US assets, and closing off PRC efforts at portfolio diversification isn't healthy for anyone in the long run.
The Chinalco deal is facing a mounting political backlash that has led to independent senator Nick Xenophon today joining National senate leader Barnaby Joyce in expressing concerns about the move. The planned investment by Chinalco in Rio Tinto will give it stakes in a number assets, including iron ore in Western Australia and increase its interest in the dual-listed miner from 9% to 18%.
"It is the uncertainty surrounding the Chinalco deal, there has been a bit of talk out today that there is a lot of opposition to the deal and this is what's weighing on it,'' MF Global senior trader Anthony Anderson said. "The FIRB extension and the senate inquiry into foreign investment is adding to the uncertainty.''
The mounting political concern follows a decision by the Foreign Investment Review Board (FIRB) to extend its review to 90 days and initiate a more in-depth examination of the transaction, after the initial 30-day evaluation period closed on Monday. The transaction, which has been backed by the Rio Tinto board, will also allow Chinalco to appoint two new non-executive board members to the global miners board.
Major Rio Tinto shareholder Australian Foundation Investment Company (AFIC) on Monday expressed deep concern over the Chinese state-backed aluminium producer becoming involved with the running of the business. AFIC cited potential conflicts on interest over investment decisions.
The Chinalco transaction has also drawn the ire of some of Rio Tinto's UK investors, who expressed disquiet over not being offered the chance to participate in a rights issue. Rio Tinto has been forced to seek a lifeline to help tackle the $US38 billion mountain of debt it incurred buying Canadian aluminium producer Alcan in 2007.
As Bloomberg notes, this is looking like a rehash of the failed CNOOC-Unocal deal. You cannot say racist sentiment doesn't exist in Australia. You have Pauline Hanson's One Nation party (of white people) and the aptly named Australian Protectionist Party plying xenophobic rhetoric. You will have a very hard time convincing me that this isn't the sort of sentiment politicians are pandering to--everything was fine here until the colored people showed up, etc, etc.