China v. Four Rio Tinto Execs

On July 5, 2009, four Rio Tinto employees, one of whom is a citizen of Australia, were arrested in Shanghai for corruption and espionage. The Rio Tinto Group is a diversified, British-Australian, multinational mining and resources group with two headquarters -- one in the UK, the other in Melbourne, Australia. Rio Tinto was founded in 1873, and is named for the site of its first mine, on the Rio Tinto river, in Huelva, Spain.

The four defendants are to be put on trial this week. Their names: Liu Caikui, Ge Minqiang, Wang Yong, ands the Australian citizen, Stern Ho. They were initially charged with stealing state secrets, which is a capital offense. Perhaps in response to diplomatic protests from Canberra, that charge was dropped, and they stand accused now of taking bribes and related acts of corruption.

Foreign businesses will be looking carefully at the trial as an object lesson in the risks of doing business in the People's Republic.

Question: is this trial really just revenge for the failure of the Chinalco deal? Chinalco is the major Chinese state controlled mining enterprise that offered in early 2009 to make a major infusion of cash into Rio Tinto in return for ownership interest in certain assets. Stockholders in Rio Tinto didn't think they were getting a fair shake, and the deal never went through.

Hell hath no fury like a dragon scorned?

Chinalco boss gives an interview

The Financial Times yesterday ran an interview with Wang Wenfu, president of Chinalco Overseas Holdings, with regard to the Rio Tinto deal.

Chinalco is a state-owned Chinese mining concern, and in February it struck a "strategic partnership" deal with the Melbourne-Australia based mining Rio Tinto Group.

As part of that deal, Chinalco is paying Rio Tinto US$7.2 billion for convertible bonds. If Chinalco were then to convert those bonds into equity, its equity share of the Rio Tinto Group would double, from the present 9% to 18%.

Many shareholders are ticked off, because of the obvious dilution effect such newly-created equity will have upon the value of their own shares.

Their concern has been sharpened by the recent increase in the value of their (and Chinalco's) shares. The shares (which are denominated in pounds and traded on the LSE) become convertible -- or, the first $3.1 billion tranche becomes convertible -- if the price gets to 30 pounds. That seemed somewhat theoretical in February, but the price is now at 28.50 pounds, so the threshold is within striking distance.

So what did Wang Wenfu have to say? Two things:

1) "This investment is a package. It is a result of two months of very intensive negotiations. It cannot be viewed separately."

2) "We respect the rights of shareholders. Shareholders should have the right to help their company and Rio management has to assess the situation and it is their judgment that this transaction is in the best interest of all shareholders."

It does not sound like he plans to do any re-negotiating. In still blunter western-world language, "A deal's a deal, suckahs."