Australia rejected a $1.7 billion Chinese bid for OZ Minerals Ltd on Friday, saying one of its mines was close to a weapons-testing site, but invited state-owned Minmetals to restructure the deal.
In a surprise move, Treasurer Wayne Swan said Australia would not approve the Chinese takeover unless it excluded OZ Minerals' prime Prominent Hill copper-gold mine, which is near the Woomera weapons-testing range in the deserts of outback south 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."
Both Minmetals and OZ Minerals said they were looking to renegotiate the deal, needed to help ensure OZ Minerals can repay debts that are due as soon as Tuesday.
OZ Minerals shares were suspended earlier on Friday.
The decision to bar the deal on national defence concerns comes at a delicate time in relations between Australian, a major supplier of natural raw materials, and China, its second-largest export customer after Japan.
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.
The Australian opposition is also asking questions about Mandarin-speaking Prime Minister Kevin Rudd's handling of the wider China relationship, with his defence minister creating a political storm by 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.
Indebted OZ Minerals faces the risk of default unless it secures the Minmetals deal, which would involve a refinancing of its bank loans. It has also been looking at some quick asset sales to raise cash. OZ said it was in talks with its lenders to roll over its debts.
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," Minmetals said in a statement issued in Australia.
Prominent Hill was discovered in November 2001, and trumpeted as one of Australia's richest finds in decades. It has passed through several hands prior to development, including global miner BHP Billiton and U.S. firm, Newmont Mining.
OZ Minerals also owns the world's second-largest zinc mine, Century Zinc, in northeast Australia, but this operation is struggling after a heavy fall in zinc prices.
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.
