https://www.theaustralian.com.au/business/mining-energy/chinese-rare-earths-outfit-shenghes-peak-resources-buy-hits-foreign-investment-rules-hurdle/news-story/bfbf8d53cb48d749fda82de9c73951e8

China’s Shenghe Resources Peak Rare Earths deal hits foreign investment rules hurdle

Nick Evans11:35AM February 18, 2022

Shenghe acquired the Peak stake from major shareholder Appian, paying $39.2m at about $1 a share for the block in an off-market deal – a substantial premium on Peak’s trading price.

China’s latest bid to bolster its presence in the global critical minerals market could be about to run afoul of Australia’s foreign investment rules, with Shenghe Resources Holdings acquisition of a 20 per cent stake in Peak Rare Earths under scrutiny.

After questions were raised by The Australian on Thursday about whether Shenghe’s acquisition of a 19.9 per cent stake in Peak could have breached foreign investment rules, the ASX-listed company told the market on Friday it would investigate the share purchase.

It is understood the company’s comments were made in response to a query from the ASX.

The Australian revealed on Monday that Shenghe acquired the Peak stake from major shareholder Appian, paying $39.2m at about $1 a share for the block in an off-market deal – a substantial premium on Peak’s trading price.

Peak has a rare earth project in Tanzania, which the company argues is the biggest undeveloped rare earth deposit in the world.

Shenghe, worth about $US4.8bn ($6.73bn) on the Shanghai market, is one of the most active of China’s privately-owned rare earths companies and already has a stake in ASX-listed Greenland Minerals as well as a development deal with RareX, both targeting offtake from new rare earth projects.

But, while the Shanghai-listed company told its own shareholders it did not require regulatory approval to buy the shares, an analysis by The Australian suggests the company may be in breach of Australia’s strict foreign ownership rules.

Shenghe is best known for helping bankroll the return to production of the only operating rare earths mine in the US, Mountain Pass. It still holds a stake in MP Materials and is the sole buyer of offtake from the mine.

Privately-owned foreign companies are generally allowed to buy up to 20 per cent of an Australian business without needing to apply for permission to do so through the Foreign Investment Review board.

But foreign governments and state-owned enterprises must seek approval for any transaction which delivers them more than 10 per cent of an Australian company. That definition includes majority privately owned foreign companies where “a foreign government or separate government entity, alone or together with one or more associates” holds more than 20 per cent of the buyers register.

An analysis of Shenghe’s top shareholders, sourced from Bloomberg, suggests that Chinese SOEs hold more than 20 per cent of the company’s stock.

The Chinese Academy of Geological Sciences holds 14 per cent of Shenghe, with the Sichuan Geological and Mineral Resources Co at 3.15 per cent, CSC Financial at 1.71 per cent and Shanxi Coal Transportation and Sales Group at 1.11 per cent.

The Australian has also identified a number of smaller holders owned or controlled by China’s central or regional governments, taking the state-owned share in Shenghe easily above 20 per cent.

Shenghe applied for FIRB permission to take part in a placement in 2016 that delivered it a 12.5 per cent stake in ASX-listed Greenland Minerals.

It also has close links and business arrangements with state-owned Chinalco, a major player in China’s domestic rare earth industry, and China National Nuclear Corporation.

The FIRB has previously warned it will apply “closer scrutiny” to transactions involving critical minerals such as rare earths, lithium and other important industrial minerals.

In 2020, it blocked an investment proposal by Baogang Group investment into Australian rare earth developer Northern Minerals, and in 2020 told China’s Yibin Tianyi Lithium Industry a proposed $14.1m investment into DRC-focused lithium developer AVZ Minerals – which would have the Chinese company a 12 per cent stake in the ASX listed company – would be “contrary to the national interest”.

Peak managing director Bardin Davis was travelling on Thursday and unavailable for comment.

Australia’s FIRB sits within the federal Treasury department, which refused to comment on whether it was aware of the transaction, or whether it was investigating whether Shenghe should have applied for approval before buying Appian’s stake in Peak.

“Treasury does not comment on the application of the foreign investment screening arrangements as they apply or could apply to particular cases,” a spokesman said.

Under federal legislation, Treasurer Josh Frydenberg could order Shenghe to dispose of its shares in Peak if the company has been found to have breached foreign investment rules.