VZCZCXRO2133
RR RUEHPT
DE RUEHBY #0117/01 0342104
ZNR UUUUU ZZH
R 032104Z FEB 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 0946
INFO RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RHEHAAA/WHITE HOUSE WASHDC
RUEHOT/AMEMBASSY OTTAWA 2275
RUEHLO/AMEMBASSY LONDON 1979
RUEHKO/AMEMBASSY TOKYO 3381
RUEHBJ/AMEMBASSY BEIJING 9334
RUEHGP/AMEMBASSY SINGAPORE 1660
RUEHJA/AMEMBASSY JAKARTA 5350
RUEHWL/AMEMBASSY WELLINGTON 5614
RUEHBS/USEU BRUSSELS
RUEHDN/AMCONSUL SYDNEY 4181
RUEHBN/AMCONSUL MELBOURNE 5971
RUEHPT/AMCONSUL PERTH 4236

UNCLAS SECTION 01 OF 02 CANBERRA 000117 
 
SENSITIVE 
SIPDIS 
 
STATE FOR USTR/BELL 
WHITE HOUSE FOR NSC 
 
TAGS: ECON EINV AS CH
SUBJECT: CHINALCO ACQUIRING RIO STAKE? 
 
¶1. (SBU) SUMMARY: Australian media is reporting that Chinese 
state-owned aluminum company Chinalco is negotiating with Rio Tinto 
to either increase its stake in Anglo-Australian resources giant Rio 
Tinto or buy specific resource assets.  Reeling from falling 
commodities prices, Rio is scrambling to pay down its large debts, 
which now exceed the company's market value.  Chinalco, which 
purchased 9% of Rio in February 2008, appears to be seeking to 
increase its foothold in Australia's resource sector by taking 
advantage of falling prices and Australian concern about minimizing 
job losses.  The Australian Government has already approved 
Chinalco's earlier request to purchase up to 14.99% of Rio, but 
would need to give a new authorization for the Chinese firm to take 
a larger stake.  Contacts believe that the Australian Government is 
leery of allowing Chinalco to take a 15% stake, as this would give 
it the right to a seat on the board.  END SUMMARY. 
 
CHINESE FIRM UPPING STAKE IN RIO TINTO 
-------------------------------------- 
 
¶2. (U) Chinese aluminum company Chinalco is currently in talks with 
Rio Tinto to increase its holdings in Rio or to acquire specific 
assets of the company. Chinalco is already Rio's largest shareholder 
(holding 9%) following its February 2008 US$14 billion investment. A 
year later, Rio has lost 80% of its market value due to a decline in 
world commodity prices and investor concern over Rio Tinto's US$39 
billion debt (from the acquisition of Canadian aluminum producer 
Alcan) and refinancing burden. Chinalco is now seeking to increase 
its strategic foothold in Australia's iron ore and aluminum assets. 
 
 
¶3. (SBU) Rio Tinto's market value recently fell to US$34 billion - 
less than the value of its debt - due to concern that it has to 
repay US$8.9 billion of debt by October 2009 and $US10 billion in 
October 2010, following BHP Billiton's abandonment of a takeover bid 
for Rio Tinto in November 2008. From April 2009, Rio will experience 
a major fall in coal and iron ore export revenue when long-term 
contracts are renegotiated - possibly with a 50% price cut; Rio has 
already been discounting to some customers. Asset sales have proved 
insufficient to reduce debt. In 2008, Rio failed in a plan to sell 
US$10 billion worth of assets to reduce its debt. Last week, Rio 
made its first big asset sale in more than five months, announcing 
the US$1.6 billion sale of its Brazilian iron ore and Argentine 
potash assets, which had a combined book value of less than US$240 
million.  Rio's revised corporate restructuring plan is to reduce 
US$10 billion worth of debt in 2009 through asset sales, cutting 
capital spending and reducing its global workforce by 14,000. For 
Rio, the deal would help avoid a costly major rights issue. 
Reportedly, a US$9 billion rights issue is planned if talks with the 
Chinalco fall through, possibly if it is vetoed by the Chinese or 
Australian governments. 
 
¶4. (SBU) The proposed acquisition by Chinalco would be one of 
China's biggest strategic overseas investments outside the financial 
sector. Chinese companies have been expected to accelerate 
investments in Australia's natural resources since the global 
Qinvestments in Australia's natural resources since the global 
downturn sharply reduced mine values and the depreciation of the 
Australian Dollar (about 35% since July 2008) has made their shares 
much more affordable than during the previous mining boom.  If Rio 
pursues asset sales, Chinalco is likely to be especially interested 
in Rio's vast Pilbara network of iron ore mines, railways and ports 
in Western Australia.  Chinalco already owns a bauxite project in 
Queensland. 
 
¶5. (SBU) Chinalco's proposed investment would require review by the 
Foreign Investment Review Board (FIRB) and approval by Treasurer 
Wayne Swan.  It could be the precursor for a wave of new Chinese 
resources investments. Approval is more likely because of the sharp 
downturn in the mining sector and capital liquidity crisis affecting 
major debtors such as Rio Tinto and Fortescue Metals.  Australian 
media reports that Chinalco and Rio Tinto are in the final stages of 
talks that could see the state-owned Chinese company invest about 
US$20 billion (A$31 billion) for asset stakes and equity in the 
miner. The proposal would need approval from Treasury's Foreign 
Investment Review Board given Chinalco's links to the Chinese 
government. On 2 February, Treasurer Wayne Swan said the government 
encouraged investment in the mining sector, but warned that all 
deals would be assessed against strict guidelines; "Any proposal to 
 
CANBERRA 00000117  002 OF 002 
 
 
increase its level of ownership above 14.99 per cent (approved in 
August 2008) would require re-assessment at that time against 
Australia's national interests." The proposal could include a 
combination of asset sales, convertible notes and share issues. In 
February 2008, Chinalco's president, Xiao Yaqin, said the 
acquisition of a stake in Rio Tinto was a strategic investment and 
the Chinese company had no plans to interfere in Rio management. The 
Treasurer may require a similar undertaking in 2009. 
 
¶6. (SBU) COMMENT: Increased Chinese resources investment in 
Australia seems a natural consequence of the long-term interest of 
both Chinalco and the Chinese government in securing greater 
security in the supply of resources and energy to China - especially 
after the very sharp increases in the price of coal and iron ore in 
recent years. The dire capital refinancing situation facing many 
Australian companies carrying large debts, combined with the 
Government's desire to limit job losses in the resource sector is 
likely to encourage approval of asset sales.   However, Swan is 
likely to be more cautious about setting a precedent of allowing 
state-owned Chinese companies to get board seats in firms with major 
Australian assets. In the current economic climate, it would be a 
difficult decision to turn away foreign investment. This investment 
could lead to a wave of strategic mining investments from China 
which could lead to closer resources and energy trade and investment 
ties between China and Australia. END COMMENT. 
 
CLUNE