Cape York bauxite key to Rio-Chinalco deal

PRESSURE is building on the federal and Queensland governments to strip the proposed Rio/Chinalco alliance of what would be its monopoly control of Queensland's bauxite riches on Cape York.

While much of the foreign investment debate over the $US19.5 billion ($25 billion) compact between Rio and China's state-owned Chinalco has been about its effect on Pilbara iron ore pricing and development, the Foreign Investment Review Board is believed to have become alarmed about the potentially restrictive impact of the proposed deal on the development of Queensland's bauxite resources.

So much so that analysts believe it is now a possibility that any clearance for the deal - after receipt of advice from the FIRB - could include a condition that Rio and Chinalco surrender up to a third of their leases covering Cape York bauxite resources.

Meanwhile, a Herald report that Chinalco was prepared to bend to FIRB demands on parts of its deal with Rio to secure clearance was viewed as positive for Rio yesterday. Its shares closed $1.85 higher at $66.64.

Sources said Chinalco was open to Rio expanding its proposed convertible note issue to Chinalco to existing shareholders, provided Chinalco retains a grip on 15 per cent of Rio compared with the 18 per cent interest proposed in the deal. But the preference among Rio's leading shareholders is for a broader-based equity raising.

The proposed Rio/Chinalco deal would bring Cape York's bauxite resources under the one umbrella. The three big leases covering the riches used to be owned by Comalco (Rio), Alcan (acquired by Rio) and Pechiney (acquired by Alcan before Alcan was acquired by Rio). Pechiney's lease was controversially stripped from the French group in 2006 on the basis that it had been dragging the chain in developing the resource.

Chalco (Chinalco's listed subsidiary) was awarded the lease, on the condition that it develop the leases in support of a stand-alone alumina refinery. A feasibility study is due in August-September.

But given market conditions, the Chinese could be forgiven for not wanting to commit to a development and instead run with Rio on the deferred expansion of Rio's Yarwun alumina refinery, in which Chinalco is due to acquire an interest.

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