Rio shareholder attacks Chinalco deal as watchdog extends probe

Mining company's senior executives accept pay freeze
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The Independent Online

The Debt-ridden miner Rio Tinto's attempt to agree a controversial $19.5bn funding plan was dealt an Australian doubly-whammy yesterday when a regulator and a shareholder voiced concerns about too much control being handed over to China as part of the deal.

The Foreign Investment Review Board (FIRB), an Australian regulator, extended its review of the Chinese aluminium maker Chinalco's investment in the Anglo-Australian miner. The initial 30-day review period ended at the weekend, and the FIRB wants up to 90 more days. This could hold up a vote by Rio's shareholders, originally slated for May.

That vote may also prove difficult for Rio after one of its major Australian shareholders went public yesterday with its concerns about the deal. "Significant influence has been given to Chinalco with no premium paid," the Australian Foundation Investment Co (AFIC) said. "We are deeply concerned about Chinalco becoming involved with the running of the business."

The fund added that Chinalco faced a clear conflict of interest because the Chinese company is both a customer and a competitor of Rio. It is also state-owned, giving it huge financial clout.

Under the proposed deal, Chinalco would pay $12.3bn for stakes in Rio's key iron ore, copper and aluminium assets and $7.3bn for convertible notes that could in time double its stake in Rio to 18 per cent.

This would be China's biggest single offshore investment and has sparked both shareholder and political concerns.

It emerged separately yesterday that Rio's senior executives have now agreed to a base salary pay freeze this year after investor dissatisfaction about recent strategic decisions.

The company is now widely thought to have overpaid to buy rival Alcan in 2007, a deal that left it saddled with a $40bn debt headache. Rio then rebutted a takeover bid by rival BHP and its shares have since slumped.

Falling commodity prices have meanwhile undermined Rio's attempts to sell non-core assets to tackle debt and forced it to seek alternative means of raising cash. About a quarter of the borrowings are repayable this year.

While Rio continues to argue that the Chinalco deal gives it access to cheaper financing than alternatives, analysts remain sceptical. "While the deal with Chinalco could solve Rio Tinto's debt repayment problems over the next two years, we believe that it would do so at too high a cost," said Evolution's Charles Kernot and Charles Cooper. "Against this backdrop, we recommend shareholders vote against the Chinalco transaction and then subscribe $10bn in a rights issue."

Sources close to the matter said Rio is open to tweaking the terms of the deal, which has also taken flak from London-based shareholders. The most likely change would be to give existing investors access to the convertibles on offer to Chinalco.

A spokesman for Rio said: "The management of Rio Tinto is actively engaged in meetings with shareholders to listen to their views."