by Gabriel Caplett
Marquette County, Michigan – In the same week both the United Nations (UN) and human rights advocates criticized China for violations involving systemic torture and suppression of journalists, Rio Tinto has indicated a desire for an expanded relationship with the country. The US $19.5 billion asset and convertible bond sale to the China-owned Chinalco has already drawn the ire of many major investors, as well as the Australian government and recently resigned board member, Jim Leng.
The deal gives Chinalco, already Rio’s largest shareholder, a nearly 20% stake in the company and up to two non-executive board seats. The deal represents China’s largest overseas investment and signifies the government’s new role as the most powerful emerging economy in the world. The deal sent Rio Tinto’s European-listed shares plummeting. The company was the biggest loser of the day with a more than 8% drop in share value.
As part of its announcement, Rio Tinto is also shelving its Eagle Project copper-nickel mine in Michigan’s Upper Peninsula. According to a company release, “The development of the Eagle Nickel mine in Michigan, US [has] been deferred until market conditions recover.”
Boom and Bust
“It is important to note that the Eagle project is one of many projects that add value to Rio Tinto,” said Eagle Project manager, Jon Cherry. “As market conditions continue to impact all industries, the Eagle team remains focused on realizing the inherent value of the project. We are continuing to work on our permits, litigation, and engineering design so that when the opportunity presents itself we will be poised to evaluate economic conditions and our next steps. The roughly 25 employees that are part of the Eagle project are integral to the ongoing activates in the U.P. These positions remain unchanged as we continue to focus on efforts and activities related to Eagle mine, Humboldt mill, and ongoing exploration activities.”
Despite the boom-and-bust nature of the mining industry and a deleterious affect on long-term local economic health, many local civic leaders are convinced the project would be a boon to the area’s economy. Cherry is scheduled as keynote speaker at the Economic Club of Marquette County’s February 16 meeting.
Until recently, Rio Tinto’s value was skyrocketing due to increased demand from developing nations China and India. According to Rio Tinto China’s Managing Director, Anthony Loo, from 2000 to 2006 the company’s sales to China increased nearly 10-fold.
While Rio Tinto and China have grown, the effect has been disastrous for the ordinary US worker.
From 1989 to 2003, at least 1.5 million US jobs were displaced due to the growing trade deficit with China, with the pace of job loss more than doubling following China’s entry into the World Trade Organization, in 2001. The State of Michigan was among the nation’s top ten losers. By 2005, long before the current global recession, the state lost at least 50,991 jobs as a direct result of this trade relationship. According to the American Manufacturing Trade Action Coalition, Michigan has lost at least 315,000 manufacturing jobs, while dropping nearly 500,000 total jobs, since 2000.
While things are certainly looking brighter for China, the demand for nickel (and copper) has certainly taken a hit. The world’s largest mining company, BHP-Billiton, has recently conceded that opening its massive Ravensthorpe nickel mine, in Australia, was a mistake. CEO Marius Kloppers says the decision “wasn’t one of our best.” According to the Canberra Times, the project’s nearly US $4 billion cost initially drew considerable criticism from analysts. BHP, although not taking quite the same beating as debt-laden Rio Tinto, has been forced to cut about 3,400 jobs (Rio is cutting a reported 14,000 jobs), globally, and is closing Ravensthorpe only eight months after it opened.
In an attempt to thwart BHP’s 2008 bid for Rio Tinto, Chinalco and Canadian Alcoa secured a 9% stake in the company for $14 billion. Alcoa is now selling its share of the investment to the Chinese company for roughly $1 billion.
BHP may decide to offer counter bids for some of the asset sales, including the Escondida Mine, in Peru, of which BHP owns a majority stake.
China Buys Kennecott Stake, Investors and Australia Nervous
The China deal, if approved by shareholders, in May 2009 and given the go-ahead by the Foreign Investment Review Board, would give China a 25% stake in Rio Tinto’s wholly-owned Kennecott Copper, a 30% stake in the company’s controversial Grasberg Mine assets, as well as up to a 50% stake in seven other mining operations in aluminum, bauxite, copper and iron ore. The deal would give China greater leverage in future pricing negotiations for iron ore, a key ingredient in the country’s rapidly expanding economy. The arrangement also affords Rio Tinto certain access to mineral deposits in China.
According to Ted Leschke, an analyst at Shaw Stockbroking, “The perception is that the strategic positioning of Rio will be eroded over time…it’s one thing to retain operational control of the assets, it’s another to negotiate over pricing of output.”
Rio Tinto CEO Tom Albanese disagrees and maintains that the deal with the Chinese company “would have been attractive before the downturn and is double so today.” According to Albanese, Rio Tinto will retain “operational control of the joint venture assets with clear governance arrangements” while the relationship with Chinalco will be at “arm’s length.”
China seems to see the strategic advantage in the deal. “With the portfolio of these global assets Chinalco will be better positioned to serve its customers in China and globally,” said Chinalco president Xiao Yaqing.
The China deal was widely expected following last week’s abrupt departure of Rio Tinto’s chairman nominee, Jim Leng. Leng strongly disagreed with the asset and bond sale, on strategic grounds, and argued that the company should raise needed equity from current shareholders. According to the London Times Online, Leng found support in company finance director, Guy Elliott, leading to speculation over a potential board split.
Ultimately, Rio’s board decided to not pursue a rights issue (offering current shareholders additional shares) as an option to paying off its nearly $40 billion debt acquired through the purchase of Alcan, in 2007, at the peak of a commodities boom. Since then, metal prices have fallen between 40 and 60 percent while Rio Tinto’s share value has plummeted. Although Chinalco offered Rio Tinto a price nearly double current market value, many investors are concerned with the long-term strategic implications of the quick sale.
“Rio Tinto’s board must be beside themselves having to do this,” said Mark Pervan, a senior commodities analyst at ANZ Bank. “It’s very unfortunate timing, buying at the top and selling at the bottom.”
Some major investors have reported to the media that they had not been consulted on the deal. One large shareholder told the Financial Times, “I’m absolutely flabbergasted…it is unacceptable at every level.”
Australia isn’t excited either.
According to the government’s treasurer, Wayne Swan, Australia will revisit its foreign ownership laws in order to tighten regulations that would apply to the current Chinalco deal. Current Australian law prohibits foreign investment greater than 15% in national assets.
China‘s Stained Record
Gao Zhisheng likely wouldn’t be impressed with the deal either. That is, if he is anywhere near a radio or television. The Nobel Peace prize nominee “disappeared” during the middle of January. Zhisheng was tortured between June 24 and July 4, as well as September 22 and early November by the draconic regime before being returned to house arrest. He defended a member of Falun Gong, a highly-repressed spiritual group, and renounced his membership in the Communist Party in 2005. Zhisheng has avoided assassination and faced a three-year prison sentence for “subversion.” Only eight years ago, the former coal miner and soldier was voted a “top ten” lawyer by a government-run publication due to his successful legal work on behalf of poor practitioners.
Since the 1989 Tiananmen Square massacre, China has faced increasing criticism of its egregious human rights record, a criticism that has been tempered, lately, due to global and strategic importance of the country’s massive economic growth.
Human rights-based group, Amnesty International’s, 2005 China report condemned the government, noting that “Tens of thousands of people [continue] to be detained in violation of their human rights and were at risk of torture or ill-treatment. Thousands of people were sentenced to death or executed.”
According to Amnesty’s February 2009 submission to the United Nations “in the course of 2007 over 100 Falun Gong practitioners died in detention or shortly after release as a result of torture, denial of food or medical treatment, or other forms of ill-treatment. According the Amnesty, detention without trial, torture and “other ill-treatment,” and the death penalty remain primary tools for China to quell dissent. Falun Gong, Uighur Muslims, Tibetan Buddhists, underground Christian groups and journalists are among the most targeted in the country.
A 2007 US State Department report on human rights accused the Chinese government of restricting public access to information, particularly through the internet. As of 2008, roughly 30 journalists and at least 50 individuals were known to be in prison for expressing beliefs different than the Chinese government, some simply for accessing banned websites. In response to outside pressure, China has blocked at least 91 websites from public viewing since January 8, including Amnesty International’s site, Google and MSN.
In May 2008 “dozens of women in south-west China” reported being subjected to forced abortions, while “trafficking of women and girls remains widespread.”
According to a report submitted to the UN, China maintains that it “respects the principle of the universality of human rights.” Foreign Ministry spokeswoman Jiang Yu told Beijing reporters on February 10 that the government is committed to “protecting and improving” human rights. China’s chief delegate to the UN forum said that “China is fully committed to the promotion and protection of human rights.”
Like Peas in a Pod
To be fair, Rio Tinto is no stranger to human rights violations either. Indeed, the company has made its name not only in selling to but also by operating in countries that violate Geneva Conventions on human rights.
The company’s Rossing uranium mine, in Namibia, operated in violation of the United Nations Council for Namibia’s “Decree No. 1″ and various UN and International Criminal Court sanctions that related to Namibia’s occupation by South Africa’s apartheid government. A UN report at the time noted that workers at the mine operated under “near slave conditions.”
Similarly, the Rio Tinto/Freeport McMoRan Grasberg Mine, in mineral-rich West Papua, operates with the country under occupation by the government of Indonesia. When local citizens formed the armed Free Papua Movement, the Indonesian military, using US-supplied attack jets, fought on behalf of the mining company. In 1998, when Amungme spokesperson Yosefa Alomang tried to attend Rio Tinto’s annual general meeting she was prevented from boarding her plane. In response to her public criticisms of the mine, Alomang had been detained and kept locked in a closet for three weeks by Indonesian soldiers, in 1994.
Some major international business players are slowly catching on. In September 2008, the Government of Norway (formerly one of Rio Tinto’s largest shareholders) divested from the company, citing “grossly unethical” environmental abuse at the Grasberg Mine. Additionally, at Grasberg, the Australian Council on Overseas Aid found mine security and military personnel were responsible for the “disappearances” of 22 civilians and torturing of 13 others between 1994 and 1995. The company has acknowledged paying the Indonesia military $4.7 million in 2001 and $5.6 million in 2002 for its services. Additionally, citizens of neighboring Papua New Guinea are suing the company, under the Alien Tort Claims Act, alleging that Rio Tinto created extensive environmental damage at its Bougainville mine, paid Black workers less than white counterparts and instigated a civil war.
LSMN
Eve Divine
doncorvette
[...] Prices to Plummet? After “deferring” the nickel-copper-sulfide Eagle Project in February 2009, the future may turn a little bleaker for Rio Tinto’s plans for a metallic [...]
[...] an attempt to sell roughly one-fifth of the company to Chinalco, in order to pay off debt, Rio met with intense shareholder opposition and was forced to back out of the highly-publicized deal. In response, Chinese officials [...]
[...] an attempt to sell roughly one-fifth of the company to Chinalco, in order to pay off debt, Rio met with intense shareholder opposition and was forced to back out of the highly-publicized deal. In response, Chinese officials [...]
[...] “deferring” the nickel-copper-sulfide Eagle Project in February 2009, the future may turn a little bleaker for Rio Tinto’s plans for a metallic [...]