When China’s government-owned aluminum company Chinalco agreed to pay $19.5 billion for an additional 9% of Rio Tinto plc (NYSE:RTP), the deal already faced a couple of problems. The biggest was the Australian government’s limit on foreign ownership of 15%. Chinalco’s share of Rio Tinto will jump from 9% to 18%.

The Australian regulator has delayed a decision on the deal for 90 days, pushing the conclusion of the deal out at least until June. Rio Tinto wanted to close the deal sooner. It’s first payment on the nearly $38 billion debt it ran up buying Canadian aluminum miner Alcan is due in October.

Late last year, Rio Tinto turned down a $140 billion takeover bid from BHP Billiton Ltd. (NYSE:BHP). Now, an Australian investment company, which includes BHP’s chairman on its board, is saying that it opposes selling such a large share of Rio to a foreign investor.

What Rio’s investors seem to want is alternatives, and a re-instatement of a requirement that 75% of shareholders uphold the Chinalco deal. Rio structured the deal to allow a simple majority to decide.

And naturally, a politician has to get in on the fun. The leader of Australia’s opposition party has made a couple of TV ads contesting the deal. The argument is that Rio is selling Australia’s wealth to a China: “We can’t have another government owning Australia.”

Rio Tinto, which operates in both the UK and Australia, also faces opposition from UK investors. The main issue there is pre-emptive rights offers, which Rio has awarded to Chinalco, but denied to other investors.

Several investors say that they want a chance to make an offer to Rio on the same terms, if not the same size, as the Chinalco offer. The argument is that existing shareholders should have had a chance to help Rio out of its financial problems, but instead the company turned to an foreign company.

This is just cry-babyism. Remember the wailing when China’s CNOOC Ltd. (NYSE:CEO) offered to by Unocal. That was not one of the free market’s shining hours, and neither is this effort to deny Chinalco.

There may be solid financial reasons for the Rio-Chinalco deal to be scuttled. But so far, none has surfaced. So far, the objections are simple jingoism and whining. Rio’s shareholders knew, or should have known, that Rio needed substantial cash soon to meet its payments on the Alcan deal. Any or all could have made an offer, but they didn’t. Then Rio got the offer from Chinalco, and now everyone wants a do-over.

Rio Tinto shares are down nearly 6% at $109.30 in early trading.  The 52-week trading range is $59.20 to $558.65.

Paul Ausick
March 17, 2009

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