Rio Tinto-Chinalco Mega-Deal Clears Its First Hurdle

Australia’s competition regulators aren’t objecting to a US$19.5 billion investment in Rio Tinto (RTP-N, RIO-L) from state-owned Aluminum Corp. of China (ACH-N), or Chinalco.

The Australian Competition and Consumer Commission concluded that Chinalco and Rio Tinto “would be unlikely to have the ability to unilaterally decrease global iron ore prices below competitive levels,” Reuters quoted the commission as saying.

In making its decision, the country’s Competition and Consumer Commission weighed whether Rio would be influenced by Chinalco to cut iron ore prices to benefit China’s steelmakers. (Chinalco and China’s steel mills are all government subsidiaries.)

The commission also looked at whether a relationship between the two companies would affect commodities in Australia such as bauxite, alumina and copper.

The Chinalco-Rio deal still requires approval from Australia’s treasurer, however, whose decision will be based on the national interest and will rely on the views of Australia’s Foreign Investment Review Board. The board will study the impact the deal would have on competition and national security, and its decision is due before the end of June.

Government approval is far from guaranteed. On March 29, Australian Treasurer Wayne Swan blocked China Minmetals from taking over Oz Minerals (OZL-A) because its Prominent Hill mine is near a military facility. In a more straightforward deal involving Chinese investment in Australia, however, Swan did give his approval to Chinese steelmaker Hunan Valin’s plan to increase its stake in Australia’s iron ore producer Fortescue Metals Group.

In an interesting twist to mounting anti-Chinese sentiment in Australia and unease over Chinese investment there, Reuters reported on April 2 that China had denied its spies had tried to hack into the phone and computer of Australia’s prime minister, Kevin Rudd, during his visit to Beijing last August.

Under the proposed tie-up between Chinalco and Rio Tinto, Chinalco will invest US$19.5 billion through joint ventures and convertible debt in a deal that will help the Anglo-Australian mining giant pay down debt and pursue investment opportunities. Chinalco will pay US$12.3 billion in cash for stakes of up to 50% in nine of Rio Tinto’s mining assets and will also pay US$7.2 billion in cash for bonds that are convertible into shares.