China Intent on Securing Long Term Metals Supply

by: FP Trading Desk

On Sunday, the state-owned giant China Minmetals unveiled a friendly $1.7-billion deal to buy Australian miner OZ Minerals Ltd. (OTC:OZMLY), the world's second-biggest zinc producer. OZ was in dire financial condition and was ripe for the picking.

According to TD Newcrest analyst Greg Barnes, the takeover is further proof that the Chinese government is intent on securing long-term metals supply. He noted that the implied takeout multiple in the OZ deal is 5.6 times 2009 EBITDA, which is similar to the valuation of Chinalco's investment in Rio Tinto Ltd. (RTP), which was announced last week.

He wrote in a note to clients:

The government does not seem shy about paying large multiples. We are somewhat surprised that the Chinese are acquiring OZ Minerals given that it is a large zinc miner, and China is not short zinc.

He added that the Chinese mining companies appear to view this market as an opportunity to secure resources. That being the case, there are plenty of distressed Canadian companies that could become targets; he singles out Teck Cominco Ltd. (TCK), Lundin Mining Corp. (OTC:LUNCF) and Breakwater Resources Ltd. (OTC:BWLRF) in his coverage universe. Teck is unlikely to be sold because of its dual share structure, but could get a cash injection similar to Rio Tinto, he noted.

China Minmetals tried to buy Noranda Inc. (OTC:NNDIF) back in 2004 and met plenty of domestic opposition.