scroll down for Tonkolili update ----------------------------------------------------------------------------- Digging For Deals: Chinese Mining M&A.
September 2010 | Corporate Financing Analysis
In a modern day 'land rush' for what lies beneath, mining is proving to be one of the hot sectors for M&A in 2010. While North American neighbours Canada and the US have traditionally dominated dealmaking in the sector, Asian acquirers - most notably from China - have also intensified activity. Indeed, in a bid to secure rights to critical mineral resources required to support the nation's extensive industrial operations, energy production and growing population, Chinese acquirers have been working overtime inking deals. And the timing could not be better: China has been in a strong position to make deals because it is cash rich, while the rest of the world is heavily indebted. According to data provider Dealogic, Chinese outbound activity in the mining sector has seen 59 deals in 2010 to-date worth a combined US$5.4bn, while the sector has enjoyed an inflow of US$7.4bn worth of deals - over half of which have been completed by firms from mainland China.
Going forward, CFW believes that China will continue with its relentless pursuit of mineral assets, intensifying a broader uptick in M&A activity in the global mining market (which stands to top 2007 highs this year). Indeed, we expect to see acquirers continuing to scour the globe for potential assets as they look to diversify their portfolios. Furthermore, we expect deal activity in the broader resources sector to continue to be fuelled by a combination of state-backed firms, the central bank and China's state-backed investment vehicles, as Beijing attempts to diversify the country's sizeable foreign reserves.
Outbound Activity: Scouring The Globe
Dealmaking in the Chinese mining sector is indicative of our broader view that outbound deal activity in the Chinese M&A market will continue to close the gap with inbound activity. Indeed China, along with the rest of Asia, has ramped up dealmaking in the mining sector, with 21% of global deals now involving Asian acquirers, compared with just 10% a decade prior. Fuelled by their newfound wealth and Beijing encouraging domestic players to push overseas, Chinese miners are busy expanding. Outbound deal activity by Chinese acquirers is characterised by expansion into new geographies, diversification of resource base and an overall return to risk. Within this, our view of a continued rise in cross-region acquisitions continues to gain credence.
Perhaps the most interesting development in this pursuit of resources is that Chinese firms are changing the way in which they do business. Acutely aware of political opposition to foreign takeovers, Chinese acquirers in the mining sector are opting to ink strategic partnerships, as opposed to taking outright ownership of firms, with increasing regularity. Indeed, CFW believes that it is the prevalence of this new structure of transaction that can help explain why deal volume in the sector is continuing to rise.
Recent examples of such deals by Chinese firms include China Railway Materials Commercial Corporation 's (CRM) acquisition of Iron ore explorer African Minerals for GBP152.6mn and Aluminum Corporation of China 's inking of a joint venture (JV) with mining giant Rio Tinto , to develop and operate Simandou, Guinea's potentially lucrative iron ore project. Indeed, the latter deal is indicative of China's attempt to tap into the broader iron ore growth story and secure a future supply of it ahead of expected price volatility. As more of these partnership deals are signed public perception of Chinese acquirers is likely to soften, facilitating a climate for a continuing flow of deals by Chinese acquirers to be made.
On the flip side, however, this is not to say Chinese acquirers are not welcome. As a recently published PriceWaterhouseCoopers (PWC) briefing entitled 'M&A in the Global Mining Sector - No Stone Unturned' suggests, 'miners are increasingly looking to secure offtake or royalty agreements with Chinese entities as a means to finance projects.' In short, Chinese acquirers have deep pockets, and miners across a number of regions are looking for investment - the two factors combined create a fertile climate for such deals to be struck.
In terms of where Chinese acquirers are making deals, Australia has long been a favourite destination. In 2009, commodity-rich Australia ranked as the top target location for Chinese acquirers in the mining sector with 44 deals, worth a combined US$6.5bn - according to Dealogic data. Indeed, deals involving Australian targets have represented the leading share of outbound M&A over the past decade, as China has sought to secure access to Australia's attractive assets and capabilities in energy. However, stealing the crown as the highest value outbound investment destination so far this year is Sierra Leone (US$1.5bn via 3 deals), with Guinea (US$1.35bn via 1 deal) coming a close second.
That said, Australia still remains a top pick with acquirers, but deal size has just been getting smaller: in terms of deal count Australia continues to lead the way with 28 deals, worth just US$0.6bn. The sudden drop in deal size in Australia can be best explained by the Australian government's decision to introduce a 'Resource Super Profits Tax' earlier this year. The tax was met with a strong backlash from those within the industry, as many projects were shelved by miners as they were forced to operate under a more expensive cost structure. However, the resulting backlash forced the government to scrap the tax and replace it with a revised 'Minerals Resource Rent Tax' in July. And now, having survived the recent elections, Julia Gillard 's new minority Australian government appears set to press ahead with the revised tax, ending months of uncertainty in the mining sector. As a result, CFW expects to see a strong uptick in deal activity in Australia, as all the deals which will have been put on hold in H110 are now likely to come to fruition.
However, we are eager to stress that it is not just in Australia where China has been active in investing in natural resource assets. China has long been invested in countries such as Kazakhstan and Mongolia, where state-backed Shenhua Energy recently announced that it will invest US$725mn to build a new coal transport railway. China has also built up a significant investment presence across the African mining industry, as this year's M&A activity in Sierra Leone and Guinea suggests. Furthermore, china has also recently making substantial loans to Brazilian and Russian oil companies in exchange for guaranteed future supplies. Over the long-term, with margins compressing for miners in developed regions, CFW expects to see China more active than Western miners in buying up assets in the riskier regions of the mining world, such as North Asia, Africa and emerging Europe.
Inbound Activity: Industry Growth Luring In Investment
The potential offered by China over the long-term has seen many foreign investors attempt to buy into the nation's growth story via the mining sector. Indeed, the Chinese market poses a mouth-watering prospect for acquirers. The PWC report forecasts that gold, silver, iron ore, coal and copper companies will remain the main targets for global acquirers. And with China's position as the world's largest producer of three of those materials (coal, copper, and gold) as well as for zinc and aluminium, being consolidated, it certainly bodes well for a continued flow of inbound activity in the sector. Furthermore, providing further upside potential, the vast properties in central and western China are yet to be prospected fully, and the full extent of total mineral reserves within the country remains unknown.
China's mining industry has expanded at a tremendous pace in recent years, as the country moves quickly to industrialise. Reaching an estimated value of US$255bn in 2009, China's mining industry continues to grow at a fast pace. BMI forecasts that the mining industry will grow at a rate in excess of 8% per annum over our forecast period, reaching US$502bn by 2014. However, given the rapid pace of growth in other sectors of the Chinese economy, this means that mining's contribution to overall GDP will remain around the 5.4-5.5% mark. At present, China's mining sector remains largely dominated by the activities of state-run entities such as Chinalco and Shenhua Energy . That said, given such bullish sentiment it comes a little surprise that overseas players are looking for an entry point. Leading the way so far this year have been Canada and the US, who have made US$627mn and U$138mn of deals in the mining sector, respectively - according to Dealogic data.
One key downside risk to this scenario is surrounding potential heightening protectionism in the industry. While in recent years, the Chinese government has encouraged M&A in the industry as a step towards optimal use of mineral resources, Beijing has indicated that it is starting to change its tune. In May, a report by Reuters suggested that China was looking at ways of protecting its strategic mineral reserves, starting with some pilot programmes to protect coal and rare earths. This comes after a period when domestic demand for raw materials has significantly outstripped supply. Consequently, the state would like to impose more control over the country's reserves of key commodities.
http://www.corporatefinancingweek.com/ -------------------------------------------------------------------------------- African Minerals and Shandong amend Tonkolili MoU
By: Chanel de Bruyn 23rd September 2010
JOHANNESBURG (miningweekly.com) - Aim-listed iron-ore and base-metals-miner African Minerals expects to receive the first $800-million in funding for its Tonkolili iron-ore project, in Sierra Leone, from the Shandong Iron & Steel Group by January 21.
African Minerals had initially expected to receive the first tranche of funding by the end of September.
The two companies on Thursday announced that they had amended their previous memorandum of understanding (MoU), signed in July, and that they had revised the target date for signing a subscription agreement for $1,5-billion in funding and a related offtake agreement.
Shandong would provide the funding in a three-stage subscription agreement in exchange for a long-term supply of iron-ore and a 25% interest in African Minerals' subsidiaries - Tonkolili Iron Ore, African Railway & Port Services and African Power.
The parties were anticipating the subscription agreement and the offtake agreement to be signed on November 20, subject to the finalisation of a due diligence.
Shandong's due diligence was expected to be concluded by October 20.
" The arrangements that we will negotiate with Shandong are for a $1,5-billion investment that will enable us to accelerate the development of Tonkolili and to build African Minerals into a major independent iron-ore producer," African Minerals chairperson Frank Timis noted in a statement.
Production at Tonkolili would start at an initial rate of eight-million tons a year of hematite by the first quarter of 2011.
The Shandong funding would be used for the construction of infrastructure and mine operations at the Tonkolili project, including a shift from a combined haul-road and rail system to an all-rail transport and logistics system.
It would also be used to ramp up phase two of the project to produce 25-million tons a year by the fourth quarter of 2012.
Shandong would acquire up to ten-million tons a year of production from the mine at discounted prices.
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