VZCZCXRO3300
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHPB
DE RUEHBN #0042/01 0890529
ZNY CCCCC ZZH
R 300529Z MAR 09
FM AMCONSUL MELBOURNE
TO RUEHC/SECSTATE WASHDC 4911
INFO RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHPT/AMCONSUL PERTH 1552
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 MELBOURNE 000042 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 03/30/2019 
TAGS: EIND ECON ETRD AS
SUBJECT: RIO TINTO EXECUTIVE: GOA LIKELY TO APPROVE CHINESE 
INVESTMENT 
 
REF: A. A) CANBERRA 180 
     ¶B. B) CANBERRA 143 
     ¶C. C) CANBERRA 117 
 
Classified By: Michael E. Thurston, Consul General, for reasons 1.4 (d) 
 
Summary 
------- 
 
¶1. (C/NF) Rio Tinto Managing Director Stephen Creese told 
Charge that concerns over increasing unemployment will likely 
lead the GOA to conditionally approve a proposed $19.5 
billion investment by Chinese state-owned Aluminum producer 
Chinalco.  Although the deal would grant Chinalco two of 
Rio's 17 board seats, Creese insists that Chinalco will not 
receive commercially sensitive information.  The Chinalco 
investment would enable China to hedge against future 
aluminum price increases and to improve future supplies of 
iron ore, but Creese noted that Rio would in turn gain access 
to PRC policy makers as well as exploration rights in China. 
In addition to the politically charged question of a GOA 
approval, the deal also faces required approvals from CFIUS, 
the PRC, Rio's board, and a non-competition approval from 
Germany.  End Summary. 
 
Prospects for Chinalco Deal 
--------------------------- 
 
¶2. (C/NF) During a March 11 meeting at Rio Tinto's Melbourne 
headquarters, Managing Director Stephen Creese told Charge 
that that the GOA "will have a hard time saying no" to a 
proposed US$19.5 billion investment by Chinalco due to the 
amount of jobs at stake (reftels).  Creese believes the GOA 
will impose conditions on the deal to publicly address 
"xenophobic" worries that have sprung up over foreign 
ownership, but he was confident that the deal would 
eventually go through.  He noted that both the Western 
Australian and Queensland Premiers have publicly supported 
the deal.  In addition to seeking approval from Australia, 
the deal still must be approved by CFIUS, Rio Tinto's board, 
the PRC, and must receive a non-competition approval from 
Germany due to control issues over convertible bonds. 
 
¶3. (C/NF) Responding to Charge's question about the wider 
significance of the deal vis-a-vis long term PRC interests, 
Creese noted that China is undoubtedly trying to hedge 
against future aluminum price increases.  He also noted that 
the PRC has a strategic interest in keeping supply lines open 
for future growth.  As part of the deal, an associated joint 
marketing company will be established to help sell iron ore 
back to China.  While Creese noted that this is, in part, a 
strategic assurance that China will receive a share of future 
iron ore production, he said that Rio's board will still 
maintain control over these decisions. 
 
¶4. (C/NF) Creese organized his briefing in such a way as to 
indicate that Rio had examined a large number of solutions to 
tackling their post-Alcan debt woes before agreeing to run 
with the Chinalco offer.  (Note: Rio has approximately $18 
billion in payments due in late 2009 and 2010 resulting from 
its very expensive takeover of Canadian aluminum producer 
Alcan at the height of the resource boom in 2007.  End note.) 
 Creese went on to say that he was frustrated that companies 
had recently "come out of the woodwork with offers to buy Rio 
assets at below basement prices."  He implied that mining 
rival BHP Billiton was chief among these and all but accused 
the company of sabotaging the Chinalco deal in order to allow 
BHP to make another pass at buying Rio assets on the cheap. 
 
Impact of Chinalco Board Members? 
--------------------------------- 
 
¶5. (C) As part of the deal, Chinalco will be entitled to two 
seats on an expanded 17-member Rio Tinto board.  Creese said 
that the board will be structured in such a way to prevent 
Chinalco members from receiving "commercially sensitive 
information."  One of these two board members would likely be 
an academic from outside China, he said.  In addition, he 
noted that the board does not set iron ore prices; this is 
done by a separate "iron ore marketing group" within Rio. 
 
Background on the Deal 
---------------------- 
 
¶6. (SBU) The Chinalco deal is a two-part US$19.5 billion 
capital injection into Rio Tinto.  The first $12.3 billion 
will be spent on strategic joint ventures in iron ore and 
aluminum that will allow Chinalco a maximum ownership of 15 
 
MELBOURNE 00000042  002 OF 002 
 
 
percent in these ventures except in the case of one interest 
(NFI) in Queensland which will be a 50/50 partnership.  The 
second $7.2 billion is a two-tranche convertible bond deal. 
Should all the bonds be converted to equity shares, 
Chinalco's stake would rise to 18 percent.  For additional 
information on the proposed Chinalco investment, see ref. B. 
 
¶7. (C) Creese said UK shareholders had protested the Chinalco 
deal on the basis of the principal of preemption which, they 
claim, should have allowed them first rights to any bonds 
issue.  Rio's board responded by saying that the bonds deal 
was part of a wider, two-part program aimed at raising enough 
capital to confront debt as well as to allow for the 
expansion of several key projects.  In addition, Rio Tinto 
benefits by acquiring rights to explore in China as well as 
gaining access to PRC policy makers.  Referring to the sudden 
departure of Chairman designate Jim Leng on the eve of the 
announcement of the Chinalco deal, Creese said this was 
solely due to "irreconcilable differences of opinions" 
between Leng and the board. 
 
Climate Change 
-------------- 
 
¶8. (SBU) Rio is studying the Rudd government's Carbon 
Pollution Reduction Scheme (CPRS) in depth.  Creese believes 
that it is roughly consistent with the GOA's White Paper on 
the environment and wants to see the details of the 
legislation.  "The devil will be in the details," he said. 
Rio opposes a carbon tax because it "does not drive 
environmental outcomes and gives governments too much 
leverage."  Rio advocates a slow start and is worried about 
Australia getting "too far out ahead of the pack." 
 
Comment 
------- 
 
¶9. (C/NF) Creese made a clear effort to downplay the 
influence Chinalco might exert on Rio Tinto should the deal 
be approved.  He stressed that Rio had given away as little 
control as possible for the greatest amount of money.  With 
commodity markets widely expected to be slow until late 2010 
and credit still tight in Australia, Rio Tinto is under 
substantial pressure to bring its balance sheet closer to 
positive territory.  Opposition leader Malcolm Turnbull is 
using rising unemployment as his primary battle cry against 
the Rudd government which is trying to hang on to as many 
jobs as possible. 
 
THURSTON