Metals: China plucking humbled mining companies

We are barely at the end of Q1 2009 yet already there have been several high profile Chinese investments in international mining assets, which when totted up look certain to raise China¡¯s total investment in the mining industry above the
$40bn spent in 2008. Indeed, such is the plight of many of the world¡¯s indebted mining companies, squeezed as they are between low prices and a virtual paralysis of credit, that they have become ripe for the plucking by cash-rich Chinese predators.

Current valuations of mining stocks have made them easy targets, especially those with looming debt repayments. Rio Tinto¡¯s share price is down 78% from its 52-week high in May 2008, while Xstrata, Oz Minerals and Alcoa are all down by around 85% from their own 52-week highs. Chinalco.s proposed $19.5bn investment in Rio Tinto symbolises the shift of Chinese state-sponsored metals producers into world-class status.

Chinalco will spend $12.3bn to acquire a 15% share in Hamersley Iron in Western Australia, 30% of Rio¡¯s share in the Grasberg gold-copper mine in Indonesia, and 50% of Rio¡¯s share in the Escondida copper mine in Chile. It will also buy $7.2bn in convertible bonds; all of which will raise its stake in Rio to 18%.

Chinalco initially bought a stake in Rio in early 2008 to help fend off a hostile bid from BHP Billiton, which had threatened to take over Rio and form a mining behemoth controlling upward of 45% of the world¡¯s sea-borne iron ore trade, besides a large market share in copper, uranium and coal. Chinalco¡¯s buying into Rio will need Australian approval; a contentious issue given that many Australian politicians are concerned about the direct ownership of national resources by foreign states.

The Rio deal is not the only transaction under consideration at Australian state level. China¡¯s Minmetals plans to spend $1.7bn to take over the struggling Australian miner Oz Minerals, following the latter.s failure to raise enough capital to meet debt repayment obligations of A$140m on 27th February.

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