The first major Australian shareholder in Rio Tinto has broken cover and revealed its opposition and deep “concern” to the proposed link up with Chinalco, the Chinese Government owned aluminium group.

Chinalco will inject $US19.5 billion into Rio to enable it to retire debt this year, while lifting its shareholding in the overall group and taking minority stakes in some of its best assets, including the WA iron ore operations of Hamersley and the Weipa bauxite operations in Queensland, as well as the huge Escondida copper project in Chile.

In a presentation to the ASX this morning, the very well connected Melbourne based listed investment company, Australian Foundation, revealed its reservations to the projected deal.

Australian Foundation is linked to the Goldman Sachs JBWere investment bank by way of history: chairman Bruce Teele and fellow board member Terry Campbell were the powerhouses behind the rise of Were and the deal with Goldman Sachs. BHP Billiton chairman Don Argus is a director as well.

AFI is a moderately large shareholder in the company’s Australian arm, with around $112 million worth of shares on 28 February, according to today’s statement. It said it sold $3.5 million Rio shares from January to the end of February.

AFI therefore carries some clout, and even more so given its lofty position in the Melbourne business community.

It said in the ASX filing that it was “deeply concerned” at the proposed deal between Rio and Chinalco:

We are assessing the proposal from the perspective of being a long term investor. Existing shareholders have not been given the opportunity to recapitalise the Company- preference given to one shareholder.

Significant influence has been given to Chinalco with no premium paid.

We are deeply concerned about Chinalco becoming involved with the running of the business: sovereign government/customer/competitor 2 seats on the parent board corporate governance issues integrated into decision making process and information flows potential conflicts of interest over investment decisions. We let the Company know our views and are seeking a response.

It is as comprehensive bucketing of the proposal as it now stands as anyone has delivered. Apart from a couple of London based institutions, led by legal and General, other shareholders in Rio have been reluctant to go public.

There were reports in the London Observer yesterday suggesting that UK holders opposed to the deal are seeking a possible legal block, while the Fairfax papers reported this morning that the Foreign Investment review Board (FIRB) had extended its review by 90 days.

Once the views of AFI became known, Rio shares fell 2%, or more than $1 to around $50.90, after opening flat at $52.02.