Glencore’s Rio Play to Hit ‘Xenophobic’ Australia Hurdle

Any move by Glencore Plc to revive its pursuit of Rio Tinto Group stands to face concerted political opposition in Australia, the world’s biggest exporter of iron ore and coal.

Australia has a record of blocking controversial takeovers, including Royal Dutch Shell Plc’s bid for control of Woodside Petroleum Ltd. in 2001, on national interest grounds.

Such acquisitions are studied by the Foreign Investment Review Board and face a final decision by Australia’s Treasurer. Dual-listed Rio is a corporate icon and investor mainstay in Australia and gets more than 80 percent of its profit from giant iron-ore mines in Australia’s Pilbara region.

These assets may be deemed strategic, said James Philips, head of mergers and acquisitions at law firm Minter Ellison in Sydney, potentially thwarting any bid. Citigroup Inc. has also flagged potential issues with the regulator.

“There have been hints in some prior FIRB decisions of a ’strategic national asset’ criterion,” Philips said. “The significance of Rio and some of its assets will mean that any proposal would be carefully considered by FIRB.”

The Glencore deal would have been the industry’s largest and created the biggest mining company worth more than $160 billion, usurping BHP Billiton Ltd., with significant production of coal, iron ore and copper.

Glencore said yesterday it’s no longer actively studying an offer for Rio, and under U.K. takeover rules it will now be barred from a renewed attempt for six months unless it obtains Rio’s board recommendation, a third party makes an offer for Rio or there are other material changes.

Rejected Deals

In November, Treasurer Joe Hockey rejected Archer-Daniels-Midland Co.’s takeover of GrainCorp Ltd., saying it wasn’t in the national interest. Singapore Exchange Ltd.’s A$8.4 billion bid for ASX Ltd. was also rejected in 2011 by Australia’s then-Treasurer Wayne Swan.

Gemma Daley, a spokeswoman for Hockey, and Francis de Rosa, a spokesman for Glencore in Sydney, declined to comment.

Iron ore is Australia’s biggest export, accounting for sales of A$6.5 billion ($7.4 billion) in August, the Australian Bureau of Statistics said Oct. 2. That’s roughly double the A$3.2 billion raised by coal for the same period.

Crown Jewels

“Australian authorities could block the deal by naming Rio’s assets among the crown jewels, as they have done in the past,” said Ben Davis, an analyst at London-based brokerage Liberum Capital Ltd. “The review board can be fairly xenophobic about foreign investment, I think that will be the major hurdle.”

Iron ore is Australia’s biggest export earner and London-based Rio is the world’s second-biggest producer of the steel-making raw material, with plans to boost its output to 360 million metric tons a year. Shipments from Australia will jump 22 percent to a record 707 million tons this year, the Bureau of Resources and Energy Economics said Sept. 24.

Australia and the regulator may also focus on whether the deal may inhibit further investment into the country, Liberum’s Davis said. Glencore CEO Ivan Glasenberg in February criticized other major mining companies for swamping the industry with mines and new production that crimped profits.

BHP plans to cut iron ore production costs to less than $20 a ton, excluding freight and royalty costs, to replace Rio as the lowest-cost producer, Jimmy Wilson, BHP’s iron ore head, said Oct. 3. The two Australian companies and Brazil’s Vale SA control about 60 percent of global iron ore exports.

“Glencore has been pretty vocal about that saying BHP and Rio are ruining the iron ore market with over investment,” Davis said. “That’s going to be a fairly big red flag.”

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