Australia extends Chinalco-Rio deal probe

MELBOURNE (Reuters) - Australia extended its review of Chinese aluminum maker Chinalco's $19.5 billion investment in global miner Rio Tinto on Monday as major Rio shareholders voiced growing concern over the deal.

The Foreign Investment Review Board's (FIRB) decision to extend its review to June was widely expected, given the deal is China's biggest single offshore investment, is complex and has sparked both shareholder and political concerns.

Under the deal, announced last month, state-owned Chinalco would pay $12.3 billion for stakes in debt-saddled Rio's key iron ore, copper and aluminum assets and $7.3 billion for convertible notes that could double its equity stake in Rio to 18 percent.

Rio Tinto's fourth-largest shareholder in its Sydney-listed shares, Australian Foundation Investment Co (AFIC), raised concern about the deal on Monday, echoing protests by Rio's top UK shareholders and flagging potential conflicts of interest.

"Significant influence has been given to Chinalco with no premium paid," AFIC said in a shareholder presentation released to the Australian stock exchange.

The fund manager owns a A$112 million stake in Rio Tinto Ltd. One of AFIC's board members and a member of its investment committee is Don Argus, chairman of Rio Tinto's spurned suitor, BHP Billiton .

"We are deeply concerned about Chinalco becoming involved with the running of the business," AFIC said, noting Chinalco was government-owned and was a customer and competitor.

Rio Tinto has argued that the Chinalco deal would give it access to cheaper financing, a badly needed benefit for the company which is saddled with $39 billion in debt.

"Shareholders are entitled to their view, and we continue to listen to them," a Rio Tinto spokesman said. Rio declined to comment on the extension. Chinalco spokesman Lu Youqing said the delay was normal procedure for such a large deal.

The Association of British Insurers, whose 400 members account for nearly a fifth of investments in the London stock market, said many shareholders would prefer to vote on a special resolution on the Chinalco deal that would require 75 percent approval.

"The fact that it has been structured as an ordinary resolution rather than a special resolution is unwelcome to many shareholders," Peter Montagnon, director of investment affairs at the group, told Reuters.

An ordinary resolution requires 50 percent approval.

NATIONAL INTEREST

Rio Tinto shares fell 2.0 percent in London to 2,035 pence by 0944 GMT, slightly underperforming a 1.7 percent fall the UK mining index . Rio shares lost 2.4 percent in Australia.

China's Export-Import Bank is talking to Rio Tinto about setting up a lending facility for joint venture projects with Chinalco or other Chinese companies, according to a letter, dated February 12, signed by Feng Zengbing, the deputy general manager of China ExIm Bank, and released by Rio on Monday.

The FIRB must make a recommendation to the government on whether the Rio Tinto-Chinalco deal is in the national interest. Australian Treasurer Wayne Swan will make a final decision.

The initial 30-day review period ended at the weekend. The extension had been expected given the complexity of the deal, which involves giving Chinalco two board seats and setting up marketing joint ventures.

The FIRB is seeking up to 90 more days to carry out its review, which would delay a final decision by Swan and hold up a vote by Rio Tinto's shareholders. Rio Tinto had hoped to convene a meeting of shareholders in May.

The regulator is reviewing two other Chinese investments in miners -- Minmetals' $1.7 billion bid for OZ Minerals Ltd and Hunan Valin Iron and Steel Group's $768 million plan to buy 16.5 percent of iron ore miner Fortescue Metals Group .

The initial deadline for the Minmetals review is this week.

While investors said it was understandable that the regulator needed extra time to review the deal, a hedge fund manager said the delay might not be good for Rio Tinto.

"The longer it takes, the more uncertainty there is over the share price," said Tom Elliott, managing director of MM&E Capital.

Rio had aimed to complete the Chinalco deal by July, but the delay is likely to put that out to later in the third quarter.

(Additional reporting by Polly Yam in Beijing and Eric Onstad in London)

(Editing by Mark Bendeich and Ian Geoghegan)