Australia's government has extended a review of Aluminum Corp. of China, or Chinalco's, proposed US$19.5 billion investment in Rio Tinto Ltd. (RTP) in a sign that the deal faces intense scrutiny.

News of the extension Monday came as one of Rio's Australian institutional investors voiced "deep concerns" over the Chinalco deal, pointing to potential conflicts of interest.

The extension of the review by 90 days had been widely expected, as the government wrestles with the pros and cons of a deal that will provide the miner with a much needed cash injection but would also see a state-backed group from a key customer country increase its interests in Australia's key mining sector.

Australia's Treasury department confirmed the extension Monday to "enable due consideration" of the proposed deal. A 90-day extension of an initial 30 day review period is normal procedure under the Australian system when more time is needed by the Foreign Investment Review Board, or FIRB, for its deliberations.

When the Chinalco deal was announced last month Rio said it expected to hold shareholder meetings to approve the transaction in May, but with a government decision now likely to come as late as mid June these meetings look set to be delayed.

"Shareholder meetings are expected to take place after the FIRB decision is made public," a Rio Tinto spokeswoman said.

Chinalco lodged an application with FIRB last month after it announced the deal, which is the biggest ever foreign investment by China and a policy headache for an Australian Government that is in the middle of attempting to strike a free trade deal with China.

Rio Tinto is banking on the Chinalco deal to ease its US$38.7 billion debt burden, with the Chinese group to pay US$19.5 billion to lift its stake in the miner to as much as 18% and take stakes of between 15% and 50% in a number of Rio's key assets.

A spokesman for Chinalco declined to comment on the extended review.

The deal has sparked debate in Australia about Chinese Government investment and has also drawn the ire of some institutional shareholders, who are angry that their holdings will be diluted by the issue of stock to the Chinese group while they have no chance to participate.

The latest shareholder to raise its voice against the deal is Australian Foundation Investment Co. Ltd. (AFI.AU), which Monday said Chinalco is being given significant influence without a premium being paid.

"We are deeply concerned about Chinalco becoming involved with the running of the business," the investment group said in a presentation to shareholders.

Don Argus, chairman of Rio Tinto's rival and former predator BHP Billiton Ltd. (BHP), is a non-executive director of AFI and sits on the group's investment committee.

While BHP has abandoned its all-share offer for Rio Tinto, the miner has made it clear it is still interested in some of Rio's assets, singling out its stake in the Escondida copper mine in Chile.

AFI, which had a holding in Rio worth A$111.9 million at Feb. 28, said the Chinalco deal raised corporate governance issues and the potential for conflicts of interest, with the Chinese group to win two seats on the board and access to the decision making process and information flows.

AFI also held A$413.9 million worth of BHP shares as at Feb. 28.

Chinalco is backed by a sovereign government that is both a customer and competitor of Rio Tinto, AFI said.

AFI also raised concerns about the convertible bonds being issued to Chinalco, arguing that existing shareholders have not been given the chance to participate and that preference had been given to one shareholder.

The Melbourne-based group said it has made its views known to Rio Tinto and is seeking a response.

Rio Tinto argues that the deal with Chinalco not only allows it to pay down debt but will give it stronger links with the nation driving world commodity demand and open up opportunities for development of mines in China.

The Anglo-Australian miner may have the opportunity to leverage its ties with China to refinance some of its debt as well, with Export-Import Bank of China, or Exim Bank, offering a line of credit to develop key mining projects in Australia, China and around the world if the Chinalco deal goes ahead.

"To further facilitate the cooperation between Chinalco and Rio Tinto, China Exim Bank has been discussing the possibility of...providing a long-term loan facility to Rio Tinto to fund joint-venture projects with Chinalco and/or other eligible Chinese companies," Exim Deputy General Manager Feng Zengbing wrote in a "financing support" letter, dated Feb. 12.

"We are highly confident of our ability to provide the proposed debt financing," said the letter, which was addressed to Rio Tinto Chief Financial Officer Guy Elliott.

-By Alex Wilson, Dow Jones Newswires; 61-3-9671-4313; alex.wilson@dowjones.com

(Lyndal McFarland in Melbourne, Rachel Pannett in Canberra and Chen Juan in Beijing contributed to this story)
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