Australia is open to foreign investment – provided it passes the national interest test. So said Wayne Swan, Australian treasurer, barely 48 hours before he rejected China Minmetals’ US$1.7 billion takeover bid for OZ Minerals. One of the assets that would fall into Minmetals’ hands – the Prominent Hill operations – lies on a military weapons-testing range. On these grounds, the deal failed the national interest test.
Does this decision render the Minmetals takeover dead? Probably not.
OZ Minerals was worth more than US$7.5 billion last year when it was formed through the merger of two smaller miners. Minmetals may be buying it for a fraction of that value, but times have changed. OZ Minerals borrowed heavily as it sought to expand when commodity prices were sky-high last year. Now they have fallen to earth and the company is sitting on debts of US$760 million that have to be repaid by the end of the month. The banks will hold off provided there is a bone fide acquisitor in town – and if it isn’t Minmetals, it will be another Chinese company. There isn’t much point in playing the nationalist card here. OZ Minerals will simply be crossing its fingers that a deal minus Prominent Hill is still attractive to Minmetals.
Does the decision threaten Aluminum Corp of China’s (Chinalco) proposed US$19.5 billion investment in Rio Tinto, which is also pending regulatory approval? Not hugely.
What the Minmetals-OZ Minerals decision does suggest is that the Australian government won’t shirk from imposing tough requirements on Chinalco for the deal to go through. These requirements are likely to focus on limiting Chinalco’s role in both the day-to-day running of the company in general and price-setting in particular. This may result in an initial rejection tempered by a willingness to consider a revised bid. Potential action by Rio shareholders – who believe Chinalco is getting privileged assets on the cheap and that Rio could raise the money it needs through issuing new equity to existing shareholders – is also a consideration in this case.
As Swan noted in his earlier interview, foreign investment has always played a significant role in Australia’s economy and this unlikely to change. What has changed – certainly in the case of the mining sector – is the source of this foreign money. Swan made his remarks ahead of a trip to Japan next week to meet potential investors. Until relatively recently, Japanese trading companies were the prime movers when Australian miners needed capital; now China is the one with the cash.