A mining firm snuggles up to its biggest customer

All loads speed to China

MOST Western mining firms are happy to sell minerals to China but like to keep the dragon at arm’s length. Rio Tinto, an Anglo-Australian outfit, is different. Not only is China its biggest customer; Chinalco, a state-backed Chinese aluminium firm, is its biggest shareholder. On December 3rd Rio announced a joint venture with Chinalco to hunt for minerals in China and extended an iron-ore joint venture with Sinosteel, another state-backed firm.

Rio’s ties with China are complex. In 2007 Rio nearly choked on Alcan, a Canadian aluminium firm it bought for a disastrously expensive $38 billion. That emboldened BHP Billiton, the world’s biggest miner, to launch a takeover bid for Rio. China, afraid that the combined firms would wield too much sway over commodity prices, sent Chinalco to block the deal by buying a 9% stake in Rio in 2008.

The BHP-Rio merger collapsed in the credit crunch. Desperate for cash, Rio invited Chinalco to double its investment and take seats on the board and direct stakes in important mines. But then, as commodity prices recovered and other shareholders complained, Rio withdrew the offer. It raised money with a rights issue and agreed with BHP to combine the pair’s mammoth iron-ore operation in Australia’s Pilbara region.

The Chinese were furious, fearing that the pair would exert too much influence over iron-ore prices (regulators agreed and recently stopped the joint venture). Chinese ire grew with the arrest in 2009 and subsequent conviction in a Chinese court of four Rio employees, on charges of taking bribes and stealing commercial secrets.

Since then Rio has done its best to cosy back up to China. This makes sense. By taking on Chinalco as a partner at Simandou, a vast iron-ore deposit in Guinea, Rio has bought political protection. Two years ago the West African government stripped Rio of half its leases at the site. It would not dare to treat China this way. Cheap Chinese capital (Chinalco has agreed to invest $1.3 billion so far) and experience at building infrastructure in Africa (Simandou needs 700km, or 435 miles, of railways) will also come in handy.

Rio’s deal to explore in China may turn out well too. Heaps of copper and coal may lurk beneath China’s relatively unexplored soil, says Andrew Keen of HSBC, a bank. A Chinese partner should help with tricky rules about property rights which have tripped up Rio’s rivals. China gets Rio’s expertise in finding ore. Rio will bet a mere $10m, out of its annual greenfield-exploration budget of about $150m.

Tom Albanese, Rio’s boss, sees wider benefits. As China’s miners expand abroad, they will either work with Western firms or compete with them. Mr Albanese reckons Rio will be well-placed to work with them. As one analyst says: keep China close, but not too close.