From: Reuters
Published April 9, 2008 04:34 AM

China stalking BHP stake: report

By James Regan

SYDNEY (Reuters) - Resource-hungry China may be planning to buy more than 9 percent of BHP Billiton Ltd, the world's biggest miner, The Australian newspaper reported, muscling in on BHP's proposed takeover of rival Rio Tinto Ltd.

The report drove up BHP's Sydney shares by 3.7 percent on Wednesday, though the group's London-listed stock later fell more than 2 percent after a senior management source at Chinese steel giant Baosteel said he was unaware of any move by his company to take a stake in BHP.

China was in the early stages of formulating a plan to buy a chunk of BHP larger than the 9.3 percent of Rio it acquired for $14 billion in February, the newspaper reported, after quietly teeing up sellers of Rio's London stock.

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Baosteel, China's biggest steelmaker, had been touted by London traders late on Tuesday as a possible BHP stake builder.

"If Baosteel has any plan (to do this) then I should be informed, but I haven't been," the source close to Baosteel's top management told Reuters.

Chinese companies and officials, seeking to safeguard iron ore and coal supplies, oppose BHP's $135 billion bid for Rio, fearing a merged group would have too much clout in negotiating prices of raw materials vital to rapid industrial expansion in the world's fourth-biggest economy.

"The mining companies are too strong in negotiations with the steel companies," said Li Xinchuang, vice president at China Metallurgical Industry Planning & Research Institute, adding that multiple steel companies may be teaming up to buy BHP shares.

"We can't rule out this possibility. It should be one of the solutions," he said.

Rio's board has rejected BHP's offer as too low.

Mining industry executives and analysts said they were not aware of any Chinese plan to buy BHP shares, and one Chinese government source was doubtful Baosteel could muster the cash for such a big purchase -- one that could cost more than the Rio stake acquired by state-owned Chinalco.

Last year, Baosteel contradicted a Chinese newspaper story that quoted its chairman Xu Lejiang saying it was considering a $200 billion bid for Rio. The report unleashed a flurry of speculation about a potential deal.

But for some, a Chinese share raid on BHP made sense.

"China realizes she can't buy companies outright, but can take a nice minority interest and at least have a stake and a voice in these key strategic resources," said Larry Grace, an analyst at Kim Eng Securities in Hong Kong.

Domenic Martino, chairman of Australasian Resources Ltd, which is developing an iron ore mine in Australia and which is 8.4 percent-owned by Shougang, China's fourth-largest steelmaker, said there was an "unwarranted" fear of China Inc.

BREAKING DEPENDENCE

Chinese firms have been looking to buy mining companies in Australia to break a dependence on BHP and Rio, who together control around one-third of global seaborne iron ore trade.

Sinosteel Corp last month offered A$954 million for iron ore miner Midwest Corp, while China Metallurgical Corp has agreed to pay $300 million to buy a Cape Lambert Iron Ore Ltd project.

"Effectively, (the Chinese) are the ones underwriting the entire resource sector, "said Adnan Kucukalic, equity strategist at Credit Suisse First Boston in Sydney.

"If I was confident about my demand for resources, why wouldn't I hedge myself against that? I would be owning part of BHP and Rio."

The price of iron ore has jumped fivefold since 2001, while coal prices are more than twice last year's levels, powered largely by strong demand from China.

The Australian report coincided with Prime Minister Kevin Rudd's political stopover in Beijing, with investment in Australia's resources sector a likely topics for talks.

Australian Resources Minister Martin Ferguson said support for foreign investment was "non-discriminatory."

Offshore investors must gain Australia's Foreign Investment Review Board approval to buy more than 15 percent of a local company. Entities judged to be backed by Sovereign Wealth Funds cannot buy any shares without FIRB approval.

($1=A$1.08)

(Additional reporting by Geraldine Chua, Denny Thomas and Tom Miles in SYDNEY, Nao Nakanishi in HONG KONG and Alfred Cang in SHANGHAI, Editing by Ian Geoghegan)

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