Australia's competition watchdog cleared Rio Tinto Ltd's $19.5 billion tie-up with China's state-owned Chinalco, clearing one obstacle to a deal that still needs the approval of the finance minister.
Australia's Treasurer Wayne Swan has the final decision and will base that on the national interest after he receives a recommendation from the Foreign Investment Review Board (FIRB), which has extended its review of the deal by 90 days to late June.
Under the deal, designed to help the mining group cut its $39 billion debt burden, China's top aluminium firm will pay $12.3 billion for stakes in Rio's iron ore, copper and aluminium assets and $7.2 billion for convertible notes that would double its equity stake in Rio to 18 percent.
The Australian Competition and Consumer Commission (ACCC) rejected local politicians' argument that Rio might push down global iron ore prices in a move to favour Chinese steel mills, but which would hurt Australia.
ACCC concluded that Chinalco and Rio Tinto would be unlikely to have the ability to unilaterally decrease global iron ore prices below competitive levels, the commission said.
It said the only way Rio could drive down prices sharply would be to increase iron ore supplies. But if it did so, other producers would react by curbing their production to prop up global prices.
The ACCC was ultimately of the view, however, that any change to global iron ore prices caused by unilateral capacity expansion decisions by Rio Tinto would most likely be very minor only and transitory in nature, it said.
It added that any strategy by Rio to continually bring forward expansion projects to keep prices down would be unsustainable over time.
It found that there was little direct overlap in Rio Tinto's and Chinalco's bauxite, alumina and copper operations in Australia, so the tie-up would not harm competition.
Chinalco welcomed the decision, saying it was an important step in achieving full regulatory clearance.
ABN AMRO analyst Warren Edney said there were no competition issues for the ACCC to consider.
Chinalco does not have any iron ore, and aluminium is traded on the London Metal Exchange. In other words that's a free market, he said.
This really provides little insight into what the FIRB is thinking ... The critical path continues to be FIRB approval, which is based on a more opaque 'national interest' test, said analyst Michael Rawlinson at Liberum Capital in London.
He said investors would closely watch the FIRB decision due on April 24 of Fortescue's Metals Group's planned $770 million stake sale to China's Hunan Valin Iron and Steel.
Rio shares traded in Australia closed up 1 percent on Wednesday, beating the broader index's 0.8 percent gain.
In London, Rio shares gained 0.7 percent to 2,256 pence by 0900 GMT, outperforming a 0.7 percent fall in the UK mining index.
If Swan approves the deal, Rio plans to ask shareholders to vote in an ordinary resolution, requiring just a simple majority -- a move opposed by some large British institutions irked that one shareholder is being favoured over others. (Additional reporting by Eric Onstad in London; Editing by Will Waterman)
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