ANALYSIS-Tough choices for OZ as Minmetals rescue misfires

HONG KONG/SYDNEY March 27 - Australia's surprise rejection of Chinese state-owned Minmetals' $1.7 billion bid for debt-strapped OZ Minerals puts OZ's immediate future in doubt and clouds other Sino-Australian deals awaiting approval.

Australia generally welcomes foreign investment, with Foreign Investment Review Board (FIRB) decisions based mainly on business considerations. But growing investment from state-owned Chinese firms has added a new foreign policy dimension to the decisions.

Still to be decided on is Rio Tinto's $19.5 billion tie-up with China's state-owned Chinalco, and Fortescue Metals Group's planned $770 million stake sale to China's Hunan Valin Iron and Steel.

In a statement on Friday, Treasurer Wayne Swan said Australia would only approve the Minmetals-OZ deal if it excluded OZ's prime mining asset -- the copper-gold mine Prominent Hill, which is close to a sensitive defence facility.

"I don't know what other alternatives the company had -- I'm sure there were interested parties, but it will affect the price because obviously their highest bidder was Minmetals. Prominent Hill is the key asset and the question is whether Minmetals is prepared to buy the company without it," said Matthew Whittall, Australia resources analyst at CLSA.

OZ'S FUTURE

OZ Minerals, the world's No.2 zinc miner, is struggling to meet a Tuesday debt deadline to repay $1.3 billion to creditors. A scuttled Minmetals deal means it is now at the mercy of lenders and must find an alternative solution to raise sufficient funds.

Earlier this week, OZ spokesman Matthew Foran said talks with lenders were "progressing". On Friday, the company said it was in constructive talks with lenders regarding the pending extension.

But no one knows what the exact response to Swan's decision will be -- and the clock is ticking.

"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," said a source at one of the lending banks, who declined to be named due to the sensitive nature of the situation.

FIND ANOTHER SUITOR?

OZ could look elsewhere for another suitor, but so far most of the interested companies, such as CITIC Resources, are also Chinese. Those potential bidders will come up against the same opposition as Minmetals.

OZ could hive off some assets in separate smaller deals, including all or part of the prized Prominent Hill, worth roughly $500 million, analysts say.

India's Hindalco Industries and Vedanta Resources may also be eyeing OZ assets. And BHP Billiton, the world's largest miner, is rumoured to be interested in all or part of Prominent Hill, bankers said.

BHP is the most logical fit, analysts say, because it operates its Olympic Dam mine near Prominent Hill in southern Australia and is capable of smelting ore on site and shipping it to overseas markets.

But BHP has so far kept quiet about its intentions.

SIGN OF THINGS TO COME?

Ultimately, Swan's decision will fan fears that Australia is hesistant to sell mining assets to Chinese state-owned companies, and could jeopardise Chinalco's $19.5 billion investment in Rio Tinto and Valin's investment in Fortescue.

The Minmetals deal is seen as less controversial than Chinalco's, as OZ's assets are not as strategic as Rio's iron ore.

Under the deal state-owned Chinalco would pay $12.3 billion for stakes in debt-saddled Rio's key iron ore, copper and aluminium assets and $7.3 billion for convertible notes that could double its equity stake in Rio to 18 percent.

Last week, Australia extended its review of Chinalco's investment to June, as major Rio shareholders voiced growing concern over the deal.

"I don't think this (Swan's decision on Minmetals) will make Rio bankers any more relaxed," an Australia-based banker associated with one of the three live China deals told Reuters on Friday. "Chinalco-Rio is looking a lot less likely." (Additional reporting by Sharon Klyne and Sonali Paul in MELBOURNE)