UPDATE 3-Australia rejects China bid for OZ Minerals

Published: 27 Mar 2009 00:16:45 PST

* Key OZ Minerals asset too close to weapons-testing site

* OZ, Minmetals discussing alternative deal

* Rejection is specific, can't equate to Rio deal - analyst

* BHP no comment on whether it may bid for Prominent Hill (Adds comments from lender, BHP talk, foreign minister)

SYDNEY, March 27 - Australia rejected a Chinese state-owned firm's $1.7 billion bid for Australian miner OZ Minerals on Friday, citing national security concerns as one of its mines is close to a weapons-testing facility.

In a surprise move, Treasurer Wayne Swan said Australia would not approve the takeover by China's Minmetals unless it excluded OZ Minerals' prime Prominent Hill copper-gold mine, which is near the Woomera weapons-testing range in the deserts of outback Australia.

"The government has determined that Minmetals' proposal for OZ Minerals cannot be approved if it includes Prominent Hill," Swan said. "I have informed Minmetals of this decision."

Minmetals and OZ Minerals said they would look to revise the deal, needed to help ensure OZ Minerals can repay debts that are due as soon as Tuesday. OZ Minerals shares were suspended.

The decision to bar the deal comes at a delicate time in ties between Australia, a major supplier of natural raw materials, and China, its second-largest export customer after Japan.

The government is rejecting Chinese ownership of Prominent Hill even though it was once part-owned by another foreign firm, U.S.-listed Newmont Mining, before the mine started up.

"Australia does not have a discriminatory policy here," Australian Foreign Minister Stephen Smith told reporters on Friday during a visit to Beijing.

The government is also considering a $19.5 billion tie-up between Chinese state-owned aluminium firm Chinalco and Anglo-Australian miner Rio Tinto, amid growing political unease in Canberra over selling key mining assets.

Australia's opposition is also attacking Mandarin-speaking Prime Minister Kevin Rudd's handling of the China relationship, with his defence minister in hot water for admitting to have taken free flights to China from a Chinese businesswoman friend.

Swan said Minmetals continued to discuss the issue with the government's advisory body, the Foreign Investment Review Board, in relation to OZ Minerals' other businesses and assets.

"The government is willing to consider alternative proposals relating to those other assets and businesses," he added.

RISK OF DEFAULT; BHP BILLITON IN WINGS?

Indebted OZ Minerals faces the risk of default unless it secures the Minmetals deal, which would involve a refinancing of its bank loans, or it can sell assets quickly to raise cash. OZ said it was still in talks with its lenders to extend its debts.

One of OZ Minerals' lenders, who declined to be named due to the sensitive nature of the talks, said he still felt the banking syndicate would roll over the A$1.3 billion ($912 million) in debts due on Tuesday for at least another month.

"I still believe the banks will give the company a short-dated extension until the end of April to assess the situation, to see whether other previous offers on the table will be reinvigorated," the lender said.

The government's decision could pave the way for bigger rival miner BHP Billiton to make a bid for Prominent Hill, which is OZ Minerals' prized asset.

"This really opens the door for just one buyer, and that's BHP," said DJ Carmichael & Co mining analyst James Wilson.

BHP declined to comment.

Minmetals said it wanted to find an agreeable solution.

"Our focus is on delivering an agreed solution to OZ Minerals that meets national interests, can satisfy lenders, deliver stability to employees and protect existing operations," it said.

Prominent Hill was discovered in 2001 and trumpeted as one of Australia's richest finds in decades. It has passed through several hands, including BHP and Newmont.

Resources analyst Matthew Whittall said it was difficult to draw conclusions from the OZ Minerals decision in relation to the Rio-Chinalco deal, which would be Beijing's biggest single foreign investment, or another deal involving Australian iron ore miner Fortescue Metals Group.

Fortescue has agreed to sell a 16.5 percent stake to China's Hunan Valin Iron and Steel. Both this deal, and the Rio-Chinalco tie-up, are still awaiting government approval.

"It does seem to be a fairly specific issue, so it's difficult to see what kind of read-through there could be for Fortescue or for Rio," Whittall said. (Additional reporting by Sonali Paul, Sharon Klyne and Miranda Maxwell in MELBOURNE, Joseph Chaney in HONG KONG and Chris Buckley in BEIJING) (Writing by Mark Bendeich; Editing by Jonathan Standing & Ian Geoghegan)