2011: a year of advances for Chinese resources M&As overseas

Media used to call the 2008 Beijing Olympics a “coming-out” party for China. Personally, even without the fireworks and fanfare, 2011 has been as much a coming-out party for China, if not more… Except that this time, the focus is on the oversea ventures in the resources sector by Chinese capital.

Speaking of 2008, it was also the year when Sinosteel took over Midwest Corp., an Australian mining company with $1.32 Billion. The deal was the first successful hostile takeover in mining performed by major Chinese firms, and the influence of Chinese capital started to attract attention, and in some cases, concern. Of course, we have come a long way since 2008: the financial crisis, rise of precious metals, the Chinese railway boom, and boost in strategic metals trade, etc. In this dramatically changing world, China not only has a financial arm greater in relatively strength, but is also more skilled at participating in the world market. No wonder major media like Bloomberg had identified China and India as potential leaders of global resources deals judging from factors such as domestic demands.

For 2011, the big-picture in the market has been defined by sovereign debt crisis, rising gold and falling commodities prices. The industry has observed a wave of consolidation with a sheer 1379 deals worth $71 billion announced in the first half of the year, according to PwC data. Among these deals, China accounted for 75 acquisitions with a total worth of $4.7 billion. Comparing the numbers, one might feel that the volume from China is not as big as imagined. However, I think that the large amount of failed attempts has to be accounted for when measuring China’s interest. It is fair to say that despite setbacks, the investment flowing from China is embedded in the nation’s resources strategies, and has become a major presence in the foreign markets- and it is only getting bigger. Another observation is that the targets of Chinese acquisition are experiencing a switch from Australia to Canada. Despite the mining tradition Australia enjoys, Canada has been recognized for its fine deposits, active financial market close to the U.S. and a more welcoming attitude towards foreign investment. I would like to mention several cases below to prove my point.

First of is the attempt by Minmetal to acquire Canadian mining firm Equinox Minerals Ltd., a proposed hostile bid of $6.3 billion in April, 2011. The acquisition attempt was labeled by the Globe and Mail as a “coming of age of China in the takeover arena”. Avoiding Canadian concerns over Chinese ownership which could potentially ruin the deal, Equinox was chosen as a controversy-free target for Minmetal since the company mainly held copper properties in Zambia. However, “white knight” Barrick Gold outbid Minmetal with a friendly offer of $7.7 billion in the last minute. Considering the falling copper prices in recent months, Barrick Gold’s offer was quite a blunder. Nevertheless, the deal nevertheless caused great disappointment in the Chinese resources circle.

Minmetal is currently undertaking another takeover attempt for Anvil Mining, an Australian copper company operating in Congo with dual listing on the TSX and ASX. Minmetal’s $1.3 billion offer in early October was at a 40% premium, and the target company is much more engaging this time. Recent news has shown, however, that the acquisition might be scuttled due to disagreement on contractual matters between Anvil and its African state-owned partner. One of Anvil’s major properties was leased from the African company, and the latter wishes to review the lease terms as the deal happens to share on profits. The non-cooperation of Anvil’s African partner is a regrettable worst-luck scenario for Minmetal. Negotiation is still on-going at this moment.

As Chinese companies venture overseas, some make surprising ventures into unfamiliar fields. Yancoal, the Canadian arm of Chinese coal giant Yanzhou Coal Mining, has purchased Canadian potash properties in Saskatchewan for $110 million in late September. The seller of the 8 potash properties was North Atlantic Potash Inc., the Canadian subsidiary of Russia’s JSC Acron. The background of the deal is China’s rapidly increasing demand for potash, and the country’s extremely limited domestic supply. It is interesting that under falling potash prices, Yancoal’s move was highly strategic that it represented the priority of China to securing stable potash supplies. Business wise, the acquisition was not even well-received at home: Yanzhou Coal’s stock prices in China experienced its largest decline of 14% since 2008 in the day after.

Except for mining opportunities, Chinese capital is also making its way into the energy sector. For instance, China’s state oil firm, Sinopec’s $2.2 billion bid for Daylight Energy has drawn enormous attention. The Chinese interest in this case is mainly natural gas from Western Canada, which carries importance on the strategic level. Sinopec’s offer of $10.08 per share represented a 50% premium in early October- a solid, pleasant opportunity for Daylight’s shareholders. Once again, the offer triggered criticism that Canadian strategic expert warned against the issue on security grounds. To be voted on December 5th, the deal now has a fair chance to succeed with shareholder backings.

Finally, I also want to mention the recent acquisition of Grande Cache Coal by Hong Kong listed Winsway Coking Coal Holdings and the Japanese Marubeni Corp., which was an atypical case of Chinese mining takeover. The case was atypical for two reasons: the completely private Chinese capital, and the involvement of a Japanese partner. My opinion is that despite being a pure “market transaction”, the acquisition was still initiated under the backdrop of China’s rising coking coal demand from the huge steel-making industry. Playing along the market rule, private capital is more sensitive to supply and demand and less likely to cause controversy. I believe that private investment and holding companies from China are certain to take on gradually important roles in overseas acquisitions.

The cases above shows that while Chinese capital is getting more and more active in the mergers and acquisitions overseas in 2011, despite stumbles along the way with a rate of failed attempts higher than normal. The PwC report states that the Chinese government has become more cautious about outward flow of investment money (in other words, state capital) due to the failed cases. Nevertheless, with China’s huge stock of cash and the nation’s resources demands, the trend is set. There will only be more, not less, Chinese attempts at M&A in markets over here with greater skills and leverage. We will see.