WA MINERS WELCOME STEPPED-UP CHINESE INVESTMENT

C O N F I D E N T I A L SECTION 01 OF 03 PERTH 000019

SIPDIS

STATE FOR EAP/ANP, EAP/CM, AND EEP
DOE FOR JEFF SKEER

E.O. 12958: DECL: 3/19/2019
TAGS: EMIN EINV ECON PREL CH AS
SUBJECT: WA MINERS WELCOME STEPPED-UP CHINESE INVESTMENT

REF: (A) CANBERRA 117, (B) CANBERRA 143, (C) 08 PERTH 42

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CLASSIFIED BY: Kenneth Chern, Consul General, EXEC, State.
REASON: 1.4 (b),(d)

1. (C) Summary: The proposed acquisition by Chinese company
Chinalco of a significant stake in Anglo-Australian mining giant
Rio Tinto (ref A) has sparked widespread debate in the Western
Australia (WA) mining sector over the prospects for increased
Chinese investment in the state's iron ore and other mineral
assets. Across the board, WA businesses say they welcome more -
and more sophisticated, as evidenced by Chinalco - Chinese
investment. Concerns remain, however, that China could take
advantage of cash-strapped mining companies to gain control of
resources and keep prices low, to the detriment of future
Australian generations. Resident Chinese company Sinosteel
believes Chinese investors will simply take their cash elsewhere
if Australian companies do not want it. The Australian mining
sector is relying heavily on economic recovery in China to boost
commodity prices (septel). Given the uncertainty over when and
to what extent this recovery will occur, nearly all the
businesses we spoke with believe the Australian Foreign
Investment Review Board (FIRB) will give the go-ahead to the
Chinalco deal, and to other deals under consideration like the
agreement of Fortescue Metals Group (FMG) with Hunan Valin and
Steel. End Summary.

CHINESE INVESTMENT WELCOME . . .
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2. (C) In a series of private meetings with the Consul General,
key WA business and government officials were cautiously
positive about the implications of Rio Tinto's U.S.$19.5 billion
deal with Chinalco, announced in February. Premier Colin
Barnett told the CG that WA, which historically has depended on
foreign investment to develop its abundant minerals resources,
welcomed Chinese investment "with appropriate safeguards," such
as limiting the number of board seats to a minority. He said
that in the past, Chinese investors had used a "ham-fisted"
approach to investing in Australia, "likely similar to their
approach in Africa where they would buy the resources, build the
mine and own the whole project." He contrasted the Chinese to
the "sophisticated and productive" experience WA has had with
the Japanese, but said the Chinalco deal signals "a maturing of
the investment relationship between China and Australia." Li
Shugang, Chinese Consul General in Perth, has told the CG
privately that following two visits from Barnett, he is
confident that the Chinalco deal will go through - it was a
win-win for both countries. Other experienced mining hands like
Tim Shanahan, former head of the state's leading mining lobby,
the Chamber of Minerals and Resources, echoed the view that the
Chinalco deal represents "progress" and greater sophistication
on the part of Chinese companies.

. . . BUT CHINESE CONFIDENCE AND INTENTIONS PROMPT UNEASE . . .
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3. (C) Duncan Calder, President of the Australia China Business
Council (WA) and an experienced China hand, told the CG that the
way the Chinalco deal is unfolding is a "reflection of the
emerging confidence on the part of the Chinese." As Calder put
it, the Chinese "are holding the cash and intend to use it
during these tough economic times to buy strategic assets in
their long-term interest." Calder believes the Chinalco
development is "scary," arguing that the deal signals that the
Chinese are more interested in taking stakes in producing
infrastructure and assets, but less willing to invest in new
development.

. . . AND BHP-BILLITON SAYS FIRB WILL REJECT THE DEAL
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4. (C) An exception to the consensus that the Chinalco deal
will go through came from Ian Fletcher, BHP-Billiton's Vice
President, External Affairs, who believes that FIRB will
recommend against approval. (Comment: BHP has been a leading
voice in using its considerable influence to lobby Canberra to
block the Chinalco deal. End Comment.) Fletcher told the CG
that it would be logistically impractical to exclude the two
proposed Chinese board members from internal company financial
and pricing data. He compared the Chinalco deal with earlier
deals struck by Japanese corporations for investments in WA and
other parts of Australia. He noted that while Japanese pubic
companies were not tied to the Japanese government, the case for

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Chinese firms like Chinalco was "a lot murkier." Implicitly
backtracking, however, Fletcher conceded that if the FIRB did
approve the Chinalco deal, the Australian Competition and
Consumer Commission (ACCC) would set strict criteria for how the
deal will be implemented.

FMG AND THE FAMILY FARM
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5. (C) Fortescue Metals Group insider Sandra Liu, in charge of
China marketing for Australia's third-largest iron ore producer,
told the CG the prospect of increased Chinese investment
activity in WA is a "tricky one." She said that WA should be
careful not to "sign away its future resource" but warned that
"the Chinese are here with the cash and they weren't born
yesterday." She cited the experience of Sinosteel (formerly
China Metallurgical Import and Export Corporation, CMIEC),which
contributed 40 percent to the Channar Iron Ore project with
joint venture partner Rio Tinto and is contractually obligated
to market the ore, currently contributing to parent company
Sinosteel's losses. Liu said "China wants better deals than
this now."

FMG DEAL REFLECTS TOUGH ENVIRONMENT
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6. (C) Liu confided that FMG's recent deal with leading Chinese
steel mill Valin Iron and Steel Group (Valin) reflects the
current tough times. Valin agreed in late February to pay FMG
A$558 million (U.S.$369 million) to take a 7.5 percent stake in
the company. On March 9, Valin agreed to pay a further A$86.8
million (U.S.$57 million). Valin also bought an additional
nine-percent stake in FMG from U.S. capital fund Harbinger,
bringing Valin's total shareholding in FMG to 17.4 percent. The
deal is subject to approval by the FIRB and FMG shareholders.


7. (C) While Liu said that Valin has a good reputation as a
"very private-sector-oriented" Chinese company, she remarked
that FMG could have had a "much better deal" last year when
investors were considering taking a U.S.$1 billion stake in FMG
shares worth three times the current price. According to Liu,
Valin is guaranteed five million tons of iron ore per year. She
added that "A$15 million essentially buys a company a place at
the FMG table" - that is, one million tons per year. FMG has
publicly stated that the cash injection from Valin will underpin
plans to ramp up production from 55 million tons per year to 120
million tons per year, but analysts say the funds may go to
easing the company's debt. FMG currently plans to produce 30
million tons of iron ore in 2009.

RESIDENT SINOSTEEL FRANK ABOUT ECONOMIC REALITY
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8. (C) WA's resident Sinosteel Managing Director "Jack" Cui
Xiaofei was also frank about the reality of financing options
available to Australian miners. Cui has headed up the
Australian operations for Sinosteel, China's largest iron ore
importer and trader, for a decade. In a private meeting Cui
told the Consul General that he believes the FIRB will approve
the Chinalco - Rio Tinto deal. If it does not, he said, then
"Chinalco can put its cash back in its pocket and spend it
somewhere else, maybe in South Africa or Germany, for example."
Cui, who speaks very good English but has been a reserved
interlocutor in past meetings, was voluble this time, often
speaking in Mandarin. Commenting on the current economic
crisis, he spoke animatedly about the double meaning of the
Chinese word for crisis - "weiji" - as both danger and
opportunity. Australians, Cui warned, must decide whether
Chinese investment represents more of an opportunity than a
danger.

NO CHINESE INVESTMENT IN WA PORT INFRASTRUCTURE
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9. (C) Other stakeholders representing prospective Chinese
investments have expressed concerns about growing public
politicization of Chinese investment issues. John Saunders, CEO
of Yilgarn Infrastructure, believes this is the case for
potential Chinese investment in WA's emerging iron-ore Midwest
region. Last July, Yilgarn, which is backed by five Chinese

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state-owned companies, unsuccessfully competed against a
Mitsubishi-led Japanese-backed consortium for the right to build
the new privately-funded Oakajee deepwater port (ref C).
Yilgarn believed it was in a competitive position for a
subsequent and separate tender to build a rail line to the port.


10. (C) The Barnett state government, however, has put the port
agreement on hold, and has signaled that state and federal
government funds will be used to build the port instead.
Barnett has also signaled that the restructured port development
plans may not include a separate rail tender, thereby cutting
out a future opportunity for Yilgarn. Barnett has also spoken
out strongly in public against "foreign control" of the port,
which Yilgarn CEO Saunders believes is targeting Chinese
investment, assumed to be controlled by China's central
government. Barnett recently faced heated criticism in the
State Parliament for his handling of the port tender process.
Yilgarn's Saunders told us that the issue of port ownership has
become a political football and is contributing to increasing
xenophobia in the press and among the WA public over Chinese
investment.

COMMENT
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11. (C) Almost all the interlocutors we spoke with believe the
Chinalco - Rio Tinto deal will go through in some form, and that
more Chinese investment activity is likely to follow over the
next few years. There is a sense of inevitability about the
outcome: business leaders believe the FIRB will have no choice
but to recommend the Chinalco deal and that Treasurer Wayne Swan
will approve because saying no means Rio will lay off workers at
a difficult economic time. Most WA observers expect that the
Federal government's regulatory agencies and political
leadership will find a way to balance Australia's immediate
economic interests with its long-term need to avoid
anti-competitive control of the country's mineral assets.
However, as the national debate over Chinese investments heats
up, a minority in WA are looking to Canberra for a different
solution. A few, like finance high-flier John Poynton, of Azure
Capital, believe that the Federal government should use
Australia's national Future Fund to provide financing for
cash-strapped industries as a safer alternative to big Chinese
investments. That said, WA's tradition of welcoming foreign
investment, and its need to continue developing major resources
projects, make continued support for the China economic
partnership strong, at least in this state. End Comment.
CHERN