Behind the scene Chinese companies continue to accumulate their positions in Canadian companies in order to secure the supply of the commodities. Recent massacre in the Junior Mining sector provides them with the best opportunity to cherry pick the best projects and teams to develop them.
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By: Simon Rees
2nd August 2013
TORONTO (miningweekly.com) - The acquisition of Canada-based Nexen by China National Offshore Oil Corporation, which closed on February 25 for $15.1-billion, provoked a national debate about Chinese investment in Canadian natural resources, including the mining sector. As the deal progressed, tabloid tattle often gave the impression that Chinese state-owned enterprises (SOEs) were poised to embark on an unchecked buying spree.
The reality of Chinese investment is more nuanced and subtle. Certainly this is the case for mining, where the driving forces revolve around domestic concerns surrounding supply, demand and costs, as well as Canada's perceived competitiveness and appeal.
"Right now there's been some hesitation in Chinese investment in the mining sector, which is primarily driven by matters of supply and demand," Norton Rose Fulbright business lawyer for mining, mineral exploration and natural resource companies David McIntyre told Mining Weekly Online. McIntyre has in-depth sector knowledge of Chinese investment within Canada.
"Chinese consumption of iron-ore, coal and base metals will be higher this year than the last, but supply growth has outpaced demand growth and is now weighing on prices. This has affected the need to make further foreign investments and to open up additional supply streams," he explained.
"For example, China-based steelmakers drive the country's demand for iron-ore. The major investment coming to Canada is primarily made by steelmakers like Hebei, Baosteel or Wisco etcetera, but they're currently dealing with domestic steel oversupply. So how much near-term future investment they're likely to make in Canadian iron-ore is hard to predict," he said.
"Moving to base metals, we often think about companies like Jinchuan, Tongling, Jiangxi Copper and they're subject to the same ebbs and flows behind price performance and issues of oversupply as other international mining companies," he added.
"But longer-term, if demand progresses in the right direction, additional supply will be needed, which is the nature of the mining business," he said. "Major Chinese investors will therefore continue with their investment strategies, although cautiously so."
"Although there's no doubt that they have made a careful note of the write-downs by the majors," he added. "They're concerned about suffering a similar fate, which has injected caution into their plans for acquisition abroad, including Canada."
"Still, I expect they're well aware of the interesting buying opportunity this market presents, and the recent announcement of the acquisition of North Parkes mine by China Molybdenum from Rio Tinto shows that the Chinese investors are willing step up," he said.
Investment Board of Canada analyst Michael Grant with specialist knowledge of Chinese foreign direct investment in Canada also highlighted the cautious approach. "Chinese SOEs have monitored the majors closely, carefully noting those who were burnt on some really big deals. They're wary of making the same mistakes," he told Mining Weekly Online.
"Yet China is keen to recycle money flowing through its banking system, which means SOEs and even private mining companies are in a strong position to continue utilising this wealth for the funding of their investment strategies," he added.
SMALL IS BEAUTIFUL
The junior sector could also prove a fertile ground for Chinese investment. "Many Canadian-owned junior companies are having a hard time, often with heavy debt constraints, which means it could be an opportune time for Chinese entities to obtain substantial stakes or even make acquisitions," McIntyre said.
"So far the only recently-published deal in this field is by China-based Kingwell Group that announced it will make a bid for Brazilian Gold, which is listed on the TSX Venture exchange," he said. "Kingwell is interesting as it's held by a privately-owned group through a Hong Kong-listed entity."
"We've also heard talk of other transactions and I wouldn't be surprised to see more investment and M&A, particularly in the gold space," he added.
"Meanwhile, don't discount investment by wealthy private individuals looking at Canadian juniors either … look out for their names on a company's board," he said. "Overall, there are a surprising number of junior mining companies with Chinese shareholders that you wouldn't necessarily know about."
Grant has certainly noticed this. "I was recently researching Saskatchewan and taken aback by the number of Chinese companies involved there, including three or four Chinese companies directly concerned with development plays," he added.
Chinese investment has the advantage of offering a junior extra protection. "Involvement in juniors by Chinese entities can add a layer of security. For example, in a worst-case scenario, if a project hits the rails then Chinese backers can assume control and halt the company's implosion," he said.
"Having a significant Chinese stakeholder can also bolster liquidity," he added. "You can imagine how attractive it would be for a struggling junior to be approached by a Chinese company that says 'don't worry, we'll fund you for the next four or five years in return for a stake'. The junior would agree in a heartbeat."
OPEN THE GATES
Previously, there has been concern that the Investment Canada Act may have dampened China's desire to invest in Canada. McIntyre is not so sure. "The Investment Canada Act is something to be managed and thought about, but I don't think it's a major issue for the preponderance of mining deals," he said. "Chinese investors seem to prefer investing in single-asset companies or projects below the radar of Investment Canada, rather than taking over big players."
"Further, there has been no material concentration of ownership by Chinese SOEs in Canadian mining - so one wouldn't expect foreign state-ownership concerns to be a big issue for the Canadian government. In fact, the provincial and federal governments are actively promoting Chinese mining investment into Canada," he added.
Issues surrounding the development of infrastructure, port capacity and supply avenues were also a consideration for Chinese investors, Grant stressed. "Canadian federal government policy is to develop supply chains into the Asian markets and the Northern Gateway [oil and gas pipeline project] will play a vital part in this … it will help unlock, strengthen and broaden the supply chains to Asia," he said.
"However, it will take time as we're talking about an awful lot of investment and a large number of regulatory approvals required. But it will eventually happen and, when it does, the Chinese will have even more incentive to invest across the Canadian resource sector," he added.
Improving supply chains can help bring shipping costs down and increase Canadian competitiveness. "And this will include increased competiveness in all kinds of commodities that never had the right portside capacity or supply avenues before," Grant said. "With these developments, Canadian output will get to the Chinese coastal markets just as cost effectively as Oceania's material."
But while Canada has strong and improving appeal, both McIntyre and Grant noted the country must not rest on its laurels. "Canada ticks a lot of boxes, yet it's worth remembering that Chinese investors are quite happy to look elsewhere if a more appealing project presents itself," McIntyre said.
"Canada must also carefully consider its perception as a place to do business among Chinese investors. They will want to know that a project in Canada can be brought on stream within a reasonable timeframe and through a clear and understandable regulatory framework," he added.
"We must understand we're not the only game in town," Grant said. "We have to be sufficiently welcoming to the Chinese so that they will continue wanting to invest here. Frankly, Canada needs the money and China is where increasing levels of wealth will come from in the future, so why on earth would we turn this away?"
Edited by: Creamer Media Reporter"