Australian senate move casts shadow over Rio shares

CANBERRA (Reuters) - Political pressures cast a new shadow over Rio Tinto Ltd's planned $19.5 billion tie-up with Chinese state-owned Chinalco, knocking its shares down as much as 10 percent on Wednesday, with Australia's Senate saying it would examine foreign investment.

Chinalco's plan to pay $12.3 billion for stakes in Rio iron ore, copper and aluminum assets and $7.2 billion for convertible notes that would double its equity stake in Rio to 18 percent has drawn political fire in Australia over the perceived threat of foreign control over local resources.

Rio shares closed 8.7 percent weaker in Sydney after tumbling as much as 10 percent, the biggest one-day fall since December 12, with sentiment soured by the maneuvering surrounding the Chinalco deal and by a broker downgrade.

London-listed shares slipped 4.6 percent to 1,890 pence by 0903 GMT (5:03 a.m. EDT), underperforming a flat UK mining index .

Senators opposed to the deal moved the vote for the inquiry, which will solicit public comment, call witnesses and make non-binding recommendations by June 17. The government can act on or ignore the findings.

Political analysts said the deadline and political opposition is unlikely to cause any delays for the Chinalco deal, which is being considered by Australia's Foreign Investment Review Board (FIRB) for a deadline of June 15, two days earlier than Senate inquiry's conclusions.

The FIRB will make recommendations to Treasurer Wayne Swan, who will have the final say over the deal.

"It just shows how politically charged this is becoming. It is the symbolism of the inquiry more than anything else that counts, because the FIRB process is in play," said Mark Thirwell, international economics analyst at the Lowy Institute think tank.

"The FIRB will make a recommendation. And it is still going to come down to the Treasurer, and behind him the government more generally ... It is just making the government's life that bit more difficult."

The FIRB is also examining two other Chinese investments in miners: Minmetals' $1.7 billion rescue bid for OZ Minerals Ltd and Hunan Valin Iron and Steel Group's $768 million plan to buy a 16.5 percent stake in iron ore miner Fortescue Metals Group .

"In our view, the reaction from Australia is overdone and this response to legislation risk may prove to be a red herring as we already expect the RIO/Chalco deal to require some form of modification," said mining analyst Michael Rawlinson at Liberum Capital in London.

"SELL THE MILK"

Senator Nick Xenophon joined the Greens and conservative National Party senator Barnaby Joyce in opposing the Rio-Chinalco deal, increasing the political pressure on Swan.

"We should be selling the milk not the cow, in this case the minerals not the mine," Xenophon told Australian radio.

Joyce, who proposed the Senate inquiry, had run television advertisements opposing the deal, saying China would never allow the Australian government to buy a mine in China.

He told parliament on Wednesday that there was growing public concern about the proposal, and the public needed an inquiry so they could express their views.

"There is immense concern out there as to why we would have a sovereign nation as the owner of a sovereign asset in our country," Joyce told parliament.

Greens leader Bob Brown said China was a police state and should be treated differently to other nations when it comes to foreign investments.

"In Beijing, if Senator Joyce was to get some votes there to establish a National Party, they'll end up breaking rocks in the Gobi Desert for a long, long time," Brown said.

The Senate inquiry will examine the international experience of investments by sovereign wealth funds and state-owned companies, and Australia's foreign investment arrangements for investments from state-owned enterprises.

(Additional reporting by Sonali Paul and Rob Taylor in Australia and Eric Onstad in London, editing by Jonathan Standing and David Cowell)