Australia faces dilemma over Chinese investors queuing to buy into its mining industry

Australia's recently elected Labor government led by prime minister and fluent Mandarin speaker Kevin Rudd is facing a difficult decision regarding its relationship with China.

China consumes a huge quantity of Australia's natural resources and the country has benefited enormously from this booming demand. However, a number of Chinese companies are no longer content it seems to remain just consumers of Australia's mineral wealth particularly, when commodity prices are rising steeply. Price settlements for 2008 hard coking coal contracts have reached record levels of around $320/mt FOB, around triple last year's prices. Iron ore contract talks have yet to be settled with China for this year, but big price rises are expected.

Half-a-dozen iron ore miners on the Australian Stock Exchange have in recent weeks announced sizeable share purchases by Chinese steel companies, and there is intense speculation that more will follow.

Interestingly, quite a few of these share purchases have been welcomed by the Australian companies involved and are spoken of in terms of partnerships by their managements.

One Chinese company, Sinosteel, has gone one step further. It is making a full-blooded takeover approach -- believed to be the first by a Chinese steelmaker -- for Australian iron ore producer Midwest and it has the blessing of its management.

Australian newspaper reports speculate that up to 10 Australian miners may have received takeover approaches from Chinese companies, adding up to a considerable amount of investment in Australia's resource sector.

Rumors of government unease

But there is talk in the Australian media that the Australian government is becoming increasingly uneasy about China's buying spree in its mining sector.

This anxiety first surfaced last February, when Aluminium Corp of China (Chinalco) jointly purchased with Alcoa a 9% stake in mining giant Rio Tinto.

Rio Tinto is facing a hostile takeover approach from BHP Billiton and market commentators have suggested that Chinalco bought its stake in Rio in an attempt to thwart BHP Billiton's merger ambitions. The share purchase is still to be approved by Australian regulators.

Overseas investors intent on taking over Australian companies have to submit an application to the Foreign Investment Review Board and a number of Chinese companies are believed to have done so.

Press reports suggest however that several of these Chinese companies have been asked by the Australian government to withdraw their applications for the time being and resubmit them at a later date. The Australian government is said to have requested time to review its policy toward Chinese takeovers and their relative merits and disadvantages.

As it does so, a growing number of Australian mining companies are left to face an uncertain future, with their growth and expansion plans put on hold.

The job of the Foreign Investment Review Board is to advise the Australian government on whether it should allow or block a takeover it deems contrary to the national interest under the Foreign Acquisitions and Takeovers Act 1975.

The board appears to prefer a low-key approach to its work. Contacted by Platts, an FIRB spokesman declined to say how many Chinese takeover approaches it was considering or when they were likely to be decided.

The FIRB's website has few details regarding foreign takeover decisions. Its most recent press statement on the subject is a personal address from Treasury minister Wayne Swan on February 17. "The Australian government welcomes foreign investment because it can make an important contribution to national prosperity and the development of our industries and resources," he stated.

Swan said the Australian government will normally have regard to six principles when deciding whether to allow a foreign takeover.

"Assessing the national interest in any given case requires a balanced view of the proposal against these principles" said Swan. The principles include, the investor's operations being independent from the relevant foreign government, the investment not leading to undue concentration or control in an industry or hindering competition and, not impacting Australian taxation revenue.

Swan also maintains that foreign takeovers will be considered on a case-by-case basis to determine whether they are consistent with Australia's national interest.

Since most of the Chinese takeover applications relate to one sector, ie mining, it will be interesting to see whether the Australian government decides to apply a consistent approach in reviewing these cases or if it rejects some applications and approves others.

ANZ bank senior commodities analyst, Mark Pevan, said he thought the Australian government would be flexible in its approach to Chinese investors. "I hear there is some leeway. They are the biggest consumer by a long way."

He suggested that Chinese investment in Australian miners may follow the pattern of Japanese investors in the 1980s. "Japanese steel mills have stakes in Pilbara [iron ore mining companies]. I see a similar trend, but not outright [Chinese] control," he added.

Macarthur in takeover battle

Australian mining companies that have so far declared significant shareholdings by Chinese investors are; Brockman Resources, Cape Lambert Iron Ore, FerrAus, Fox Resources, Midwest, and Prosperity Resources. Macarthur Coal is in the middle of a takeover battle and has a significant Chinese shareholder that may or may not be behind the takeover approach, Macarthur won't say. Fortescue, an iron ore miner, is said by Australian newspaper reports to have attracted attention from possible Chinese investors.

Brockman Resources is developing a 10 million mt/year iron ore project at Marillana, Western Australia and has signed two confidentiality agreements with Chinese companies including, Haoning Group.

"Brockman can confirm it has signed a confidentiality agreement with Haoning Group relating to potential iron ore off-take agreements and a possible equity position in the company and that managing director Wayne Richards held discussions with Haoning Group during his recent visit to China," said Brockman Resources in an April 22 statement to the Australian Stock Exchange.

Cape Lambert Iron Ore announced April 29 its agreement to sell its iron ore project to China Metallurgical Group for $A400 million ($375 million was on track. CMG had completed due diligence on the project with a JORC resource of 1.56 billion mt and had re-submitted its application to the Foreign Investment Review Board as it had been asked to do. "It is now expected that a decision will be made by the FIRB prior to May 28, 2008," Cape Lambert said.

"[CMG] has advised that they now wish to finalise the sale agreement related to the acquisition of Cape Lambert Iron Ore project, which gives us great confidence that this company defining transaction will soon be completed," said Cape Lambert chairman, Ian Burston.

FerrAus, a ferrous metals explorer in Western Australia including an iron ore resource in East Pilbara said it has reached an agreement with Chinese mining house, Western Mining Co, to take up a 10% placing of its shares at A$1.15/share. FerrAus chairman, John Nyvlt said in a May 5 statement he welcomed WMC's investment, its first in a ferrous metals resource project in Australia. "Members of FerrAus and WMC management teams have known each other for a long time and share common visions on business development. The support of a major mining house is a big plus to FerrAus's project development plans," he stated. WMC chairman, Mao Xiaobing, said in the same statement that FerrAus "represents a great opportunity for WMC" and added he was "excited about the exploration and development potential of their iron, manganese and nickel projects."

This is an excerpt.

Created: May 13, 2008

Return to top

International Coal Report brings you the most up-to-date news and prices on the international steam and coking coal markets. One subscription brings you not only the weekly publication but also a daily digest, Coal Trader International , providing up-to-the-minute information on price movements, market development, tenders, bids and offers as well as key Platts price assessments. In addition to these two market-leading publications, a subscription also includes a monthly electronic statistics supplement providing key worldwide coal data on production, imports, exports and pricing giving you an indispensable market research tool. Take a trial or start a subscription today.