China's Baosteel / Australia's Aquila: Harbinger of Things to Come

Includes: BHP, HBM, RIO, VALE
by: Erik Bethel

Today, Baosteel Group Corp, China’s largest steel company, agreed to buy 15% of Aquila Resources (ASX:AQA) for US$240 million. Aquila is a US$1.3 billion market cap Australian iron and coal company. It holds interests in the Isaac Plains coal project, Belvedere coal underground project, and Peak Downs East underground project, as well as in the Bowen Basin tenements in Central Queensland. Company also owns interests in the coal projects in Mozambique and Botswana coalfields of southern Africa. Aquila has alsoannounced plans to develop an A$4.1 billion iron ore mine, port and rail project in Western Australia.

According to Aquila, Baosteel will buy 43.95 million new Aquila shares at A$6.50 each. This is roughly 1% less than Aquila’s last traded price of A$6.55 on Aug. 25. "The strategic co-operation that has been established by the signing of these two agreements is expected to deliver significant long-term benefits for both Aquila and Baosteel, and significant benefits to both Australia and China," Aquila said in a statement on Friday. Meanwhile, Baosteel reported that this represents its "first major international strategic investment in a public company and is an important transaction in Baosteel's strategy to secure long-term supply of critical steel raw materials for its steel making business."

It's been a great year for Aquilla. The firm, with roughly US$70MM in sales, has ridden the China iron ore gravy train which has propelled the stock over 90% this year. And prior to the Baosteel transaction, HudBay Minerals (HBMFF.PK), a TSX listed firm, completed a 12 million share private placement in Aquila.

We see more deals like this over the next year. China has invested $56 billion globally in order to reduce steelmakers' dependence on the Big Three iron ore miners [Rio Tinto (RTP), BHP-Billiton (NYSE:BHP) and Vale SA (NYSE:VALE)]. And for China, buying Australian- or Toronto- listed mining companies makes a whole lot more sense than developing greenfield projects themselves.