Australia is taking a huge gamble on the recent deal to merge China and Rio Tinto, a move that is laid out in a loosely-constructed contract and more code words than anyone could crack. If this big deal goes through, what could be the impact for exchange traded funds (ETFs) on both sides of the issue?At stake is Australia’s most important economic relationship, one that is hung up to an extraordinary extent on this single deal. In turn, this would be China’s largest overseas deal, in Chinalco’s bid to own 18% of Rio Tinto, explains The Australian.

The deal would make Chinalco Rio Tinto’s dominant shareholder and guarantee it two board seats. There are tow major reasons the presure is mounting for the deal to occur:

  1. A concern that a British-based company has forged an arrangement with a Chinese state giant that does not adequately protect the value of strategic Australian resources, especially iron ore. Core assets would be reorganized.
  2. The premium provided by the Chinalco bid above the then-share price has been swallowed and left behind by the rising value of Rio Tinto stocks. The Chinese-driven demand for the commodities has taken the share prices higher because of a resurgence in overall demand.

If and when the deal goes through, the world will be dominated by four huge global mining giants, with a contraction of the once-broken global mining industry.

  • iShares MSCI Australia Index (EWA): up 9.2% year-to-date; Rio Tinto is 2.6%

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.