Bold Chinalco in powerful position
Speaking to reporters yesterday in Sydney, Chinalco boss Xiao Yaqing explained that his purchase of US$13 billion worth of shares in international mining giant Rio Tinto was driven solely by financial considerations.
Chinalco bought the stake purely in the hope of making a decent return on the investment, he insisted. Few believed him. Even though US aluminium maker Alcoa chipped in US$1.2 billion to lend the deal an odour of respectability, most observers assumed a murkier strategic or political motive.
That is not surprising. The news that China's biggest state-owned aluminium company had acquired a sizeable slice of Rio Tinto immediately blew rival miner BHP Billiton's takeover bid for Rio wide open. Speculative explanations for Chinalco's move were soon flying thick and fast.
The most sensational possibility - that Chinalco is planning a rival bid of its own for BHP, backed by Beijing - lacks credibility.
There can be little doubt the mainland authorities would dearly like to scupper a BHP-Rio merger. The combined company would control about one-third of the world's international iron ore trade and a quarter of its supply of bauxite, the basic raw material for aluminium production, lending it enormous pricing power in negotiations with Chinese importers.
Yet, despite press reports of a US$120 billion war chest of official funds to back a Chinalco-led bid, Beijing is unlikely to support a takeover attempt.
CNOOC's unsuccessful bid in 2005 for US oil company Unocal taught Chinese officials just how difficult state-backed cross-border acquisitions of resource companies can be. Like Washington, Canberra reserves the right to reject foreign takeovers 'that are determined to be contrary to the national interest'. It blocked Shell's proposed 2001 takeover of Woodside Petroleum and, according to Australian political analysts, would certainly block a Chinese bid for the far larger Australian businesses of Rio.
But even without a takeover bid, owning a chunk of Rio could have significant strategic advantages. Mr Xiao has long wanted to build a diversified mining and metals company. The potential for co-operation with Rio opened up by the purchase catapults Chinalco an appreciable way in that direction.
Finally, there is the possibility that Mr Xiao was right and that the investment is purely financial. Chinalco bought into Rio at a 21 per cent premium to the stock's market price and at a 35 per cent premium to the value put on it by BHP's three-for-one bid.
That leaves BHP with three options. It could raise its bid to a level that earns Chinalco a decent return - say five shares for one. Or it could strike a deal with the mainland firm to carve up Rio, leaving Chinalco holding some of Rio's choicest assets. Or BHP could walk away from the deal altogether, allowing its bid to lapse.
Whatever Mr Xiao's real intentions, investors applauded his intervention. Yesterday, shares of Chalco, Chinalco's Hong Kong-listed subsidiary, leaped 11.11 per cent.
Even if a full takeover bid by Chinalco for Rio Tinto is out of the question, it looks as if Mr Xiao's ambitious move puts his company in a powerful position.