chinese target mining bargains as stocks dive

same principle applies to all those commodities China is intent on securing. And LNG would rank right up there.

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Chinese target mining bargains as stocks dive

by: Barry Fitzgerald
From: The Australian
July 04, 2013 12:00AM



CHINA'S state-owned enterprises and private companies are preparing to exploit distressed equity and asset values in the mining sector by ramping up acquisitions and investments ahead of a forecast return to stronger commodities demand.

Fund managers, bankers and transactional lawyers are indicating that activity is starting to pick up again -- exploiting an opportunity as valuations in Australia's mining sector are crushed in the stockmarket.

Private equity fund manager and China-watcher Jason Chang says the world's biggest consumer of mineral commodities remains obliged to secure long-term mineral supplies, no matter what the short-term negativity brought on by the impact of the country's credit squeeze on demand and prices.

"Our prediction is that some time in the next six to 12 months, China's new leadership will ramp up the economy again," Mr Chang told The Australian from Singapore, en route to Beijing.

Mr Chang, previously the partner in charge of KPMG's China practice, now heads the Melbourne-based private equity resources fund EMR Capital, with $100 million under management.

"As with all changes of leadership in China, it takes six to 12 months to settle in. And we expect -- and our partners in China are of the same view -- that now is the time to position ourselves for the growth that is going to come in about 12 months," Mr Chang said.

Mark Barnaba, Macquarie Group's West Australian chairman and a director at Andrew Forrest's Fortescue Metals Group, said: "The Chinese understand the demand side of the commodity equation better than most. I think the market has been oversold, if you look at the steep sell-off in companies' shares versus the commodity markets."

Mr Barnaba, who also heads Macquarie's Global Resources Group, said there had been a "disconnect" and it was "certainly presenting a wonderful set of opportunities".

Mr Chang said the massive sell-off in mining shares would act as a catalyst for more activity, as a dollar today bought a lot more shares than it did 12 months ago.

But he also warned that on the flipside, China was getting a "lot more savvy, knowing that their past investments have not always been successful".

"So, on the one hand they are more cautious. But on the other hand the market sentiment and environment is such that you will see more merger and acquisition activity by the Chinese in the junior to mid-cap space," Mr Chang said.

"We know that there are a lot of parties in China with a lot of interest, both from the state-owned sector as well the private sector."

Mr Chang agreed with Mr Barnaba that an "amazing disconnect" had opened up between fundamental values and equity values made the gold sector a hot-spot of Chinese interest. Interest in copper had slowed "temporarily" in line with the Chinese economic slowdown, but medium to long-term activity in the red metal -- along with coking coal and the crop nutrient, potash -- remained strong.


"So there is still interest there, but I think people should be prepared for the Chinese being a little more fussy about what they invest in," Mr Chang said.

He said EMR was also noticing a lot of interest from US institutional investors and fund managers for opportunistic investment in the battered resources sector.

Clayton Utz partner Jonathan Li said that while Chinese state-owned enterprises were noticeably quiet on the investment front in Australian mining, that was not the case the last time equity and investment values tumbled in the wake of the global financial crisis.

It was in that period that SOEs moved on to Rio Tinto's share register, as well as acquiring a portfolio of mining assets from OZ Minerals.

Mr Li said an emerging trend was apparent encouragement from Beijing for private enterprises to take the lead in buying distressed assets. Private Chinese interests recently took control of West Australian lithium producer Talisman and led the ultimately unsuccessful bid for ASX-listed African copper producer Discovery Metals.

Market speculation about likely suitors from China centres on the country's biggest steelmaker, Baosteel, and Hunan-based Valin Steel, the second-biggest shareholder in Fortescue with 14.7 per cent.

US investment bank JPMorgan has also been talking up the China story in a research note released this week that suggests investors should move to overweight positions in commodities.

"Against one-sided sentiment and following 15 months of destocking, Chinese buyers are going to realise very soon this is the opportune moment to back up the truck and to restock supply channels where China is import-dependent," the report said.

"A surge in Chinese buying of a metal at a lower price has already been observed in gold.

"We expect renewed vigour in imports of copper and oil. It is quite obvious what the Chinese should do here in physical markets, in pursuit of China's long-run economic and social self-interest."

Drilling company Boart Longyear provided the latest confirmation of the industry's distressed state earlier this week, announcing a profit downgrade and debt negotiations. The company revealed that close to half of its global fleet of 1180 drilling rigs were now sitting idle.

http://www.theaustralian.com.au/business/mining-energy/chinese-target-mining-bargains-as-stocks-dive/story-e6frg9df-1226673956235