Feb. 17 (Bloomberg) -- OZ Minerals Ltd., the world’s second-largest zinc mining company, traded 22 percent below China Minmetals Corp.’s A$2.6 billion ($1.7 billion) cash takeover offer on speculation the Australian government will block the deal.

OZ Minerals closed 17 percent higher at 64.5 cents in Melbourne today as the shares traded for the first time since Nov. 27. That’s 18 cents lower than the 82.5 cents a share cash offer from state-owned Minmetals that was accepted yesterday by the Melbourne-based company’s board. OZ Minerals rose 17 percent to 0.35 euros (A$0.69) by the close of Frankfurt trading.

“There is always the possibility that the government could block the bid,” said Jamie Spiteri, head dealer at Shaw Stockbroking Ltd. in Sydney, adding the lower trading price also signaled a rival bid was unlikely. “You’ve still got three months until you get your cash from the bid so therefore the stock is trading at a discount.”

The bid needs approval from Australia’s foreign investment regulator and Treasurer Wayne Swan, who last week tightened takeover laws when Aluminum Corp. of China agreed to invest $19.5 billion in Rio Tinto Group. The rout in commodity prices is prompting China to lock in global resources by targeting debt-laden mining companies.

“The key condition in our view is Foreign Investment Review Board approval,” RBC Capital Markets analyst Geoff Breen said in a report dated yesterday. The stock will trade at a discount on “timing and completion risk,” he said.

‘National Interest’

Swan can reject the Minmetals and Chinalco bids on national interest grounds. Former Coalition government Treasurer Peter Costello invoked the powers in 2001 to block a bid by Royal Dutch Shell Plc for Woodside Petroleum Ltd. Minmetals failed to reach an accord to buy Noranda Inc. in 2004 as some Canadian politicians raised objections.

“I am not making any comment on those foreign investment proposals,” Swan told reporters in Brisbane today when asked about the Rio and OZ Minerals proposals. The two bids are being studied by the board and “I make a decision on those as I judge them in the national interest,” he said.

Minmetals wants OZ Minerals to secure supplies of minerals by acquiring zinc, copper, gold and nickel mines in Australia, Laos and Indonesia. Beijing-based Minmetals, a Fortune Global 500 company, agreed to repay OZ Minerals’ A$1.2 billion debt should it get 100 percent ownership.

New Bid?

“The only sure bid we have right now is the Minmetals one, so everything else beyond that is speculation,” Hunter Hillcoat, a Sydney-based analyst at Austock Securities Ltd., said today by phone. The possibility of a new bid emerging “is low,” he said.

Australia last year approved a A$1.36 billion takeover of Midwest Corp. by Sinosteel Corp., China’s second-biggest iron ore trader and this month approved the sale of a 50.1 percent stake in zinc producer Perilya Ltd. to Shenzhen Zhongjin Lingnan Nonfemet Co..

“The transaction is likely to go ahead,” ABN Amro Holding NV analysts led by Sydney-based Lyndon Fagan said in a report yesterday. “Shareholders should accept the offer given the difficult environment for asset sales/debt refinancing, the all cash-consideration, and the healthy premium on the last close.”

To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net

Last Updated: February 17, 2009 12:23 EST