Chinalco's lesson in fair play

The Chinalco mistakes in its proposed agreement with Rio Tinto are an example to all those who negotiate in hard times – beware of doing too tough a deal when your negotiating partner is down. It can come back and bite you.

Last year Rio Tinto was on the ropes. The London based company was on the bounce back from rejecting BHP's offer and with metal prices down and a mountain of debt, Rio Tinto was desperate for a deal. Had Chinalco initiated a simple deal with an equity interest in Rio Tinto and a small equity interest in some of the key assets it would have been very hard to knock them back. Later they could have gone further.

But they saw that Rio Tinto was on ropes and negotiated an outrageous 600 page morass of agreements that gave Chinalco wide powers over marketing big slabs of the Rio Tinto minerals (they sub-contracted those powers to Rio Tinto but that didn't change the long term effect). Plus, they sought power in executive committees that covered just about every aspect of the Rio Tinto business including executive performance and investment decisions. Combine that with board representation and being the major shareholder and you have effective long term control.

After wading through the documents I set out the incredible scope of the agreements (Dissecting Rio-Chinalco, March 16, Chinalco's power play, March 17, What's control of Rio worth? March 18). Then in Rio-Chinalco smoke and mirrors March 25 I reviewed the reaction.

Growing awareness of these issues has changed the debate and when Andrew Forrest at Fortescue negotiated Chinese joint venture deals without all the silly side deals, Chinalco's position became untenable.

When you overplay your hand there can be a backlash and, quite properly, opposition leader Malcolm Turnbull has opposed the deal. The community opposition tends to be about the level Chinese equity rather than the 600 pages of side deals, which is where it should be focused.

Hopefully in his likely rejection of the Chinalco-Rio deal Treasurer Wayne Swan will emphasise the 600 pages of agreement rather than the Chinese equity itself.

Chinalco was doing its dealing when the metals markets were down. Had they done a simple deal it would have passed quickly and they would have achieved a bargain. By overplaying their hand they are likely to miss out completely. The metals market has now moved and in the unlikely event that Swan accepts the deal, shareholders will reject it.

And looking at today's copper prices, BHP should have kept going. They would have secured a good deal if they could have overcome the European regulatory restrictions.

The 'KGB' – Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz – will speak at the annual Melbourne Press Club Business Lunch next Wednesday 6 May at Melbourne's Crown Towers, analysing the Victorian Budget and previewing the second Rudd Budget in the context of the global financial crisis. Places are limited. For information and to reserve tickets, clickhere.