Afavoured cliché of China-watchers is that the two characters that together mean ‘crisis’ (危机) separately denote ‘danger’ and ‘opportunity’. In fact, linguists argue that this is a fallacy, and that the character that’s supposed to mean ‘opportunity’ has other usages too. It only really carries the specific meaning mentioned above when compounded with a further character.
That doesn’t stop wide reference to the term (although WiC has avoided it thus far).
But this week we wonder if it might have a more specific applicability – in the timing of the latest round of China’s acquisitions of natural resources overseas.
Clearly, commodity prices are in a period of major weakness, much of it triggered by concerns that future Chinese demand is not going to be as pressing as bulls had hoped.
On the other hand, there are many who think such a view has been oversold. And in the same week that Bloomberg declared that copper had entered a “bear market” (off 30% from its high), Chinese buyers seem ready to take their chances on commodity prices in future, even in the current downturn.
In one instance, state-owned China Minmetals has offered $1.3 billion to take over Anvil Mining, a copper producer with mines in the Democratic Republic of Congo.
The deal is being recommended by Anvil’s board and has won the approval of the Toronto-listed firm’s biggest shareholder.
Anvil’s main asset, the Kinsevere mine, produces 38,000 tonnes of copper a year, and is forecasting that this will rise to 60,000 tonnes. A statement released on the proposed acquisition this week also added that Anvil’s experience and relationships in southern and central Africa would be of benefit to Minmetals, which sees the region as having “enormous exploration potential”.
The CEO of Minmetal’s Hong Kong listed arm told the Financial Times: “Our aspiration is to see ourselves in the next three to five years growing into one of the top mid-tier mining companies. We feel that we are underweight in copper. Copper is a market that we see through the medium-to-long term as being very strong.”
Nor was this the only mining acquisition to emerge in recent days. On Monday, Sichuan-based Hanlong announced it had reached agreement to acquire Sundance Resources for $1.3 billion. The Australian firm also has major exposure to African resources, this time to iron ore deposits in an area bordering the Republic of Congo and Cameroon.
Hanlong had to sweeten its bid by 14% to get the deal done, after its first offer in July was rejected.
Indeed, the story of the Chengdu firm’s Africa foray is jam-packed with ‘danger and opportunity’ when you consider the future financing envisaged under the deal, as well as Hanlong’s status as a privately-owned company, and its stated ambition to become one of the world’s top miners of iron ore.
It’s not the first time we have written about Hanlong (see WiC85), but a brief recap of the company’s history is useful.
The firm’s founder, the Sichuanese tycoon Liu Han, cut his teeth in the 1980s selling building materials and oils. He characterises the period, says 21CN Business Herald, as a time of struggle but then got his big break in 1994 in the local steel market. Playing the futures market and signing what the 21CN terms an “almost insane” contract to buy 40,000 tonnes of steel from Chengdu Steel, Liu timed the market immaculately.
He used the profits from the gutsy trade to start his new firm Hanlong and had soon diversified from bulk commodities like PVC into transportation and real estate.
Then in 2001 he made his second big punt: investing Rmb5.2 billion in a hydroelectric power plant in his native province. This again proved a success, generating power for his own industrial concerns and selling the rest to the grid.
Liu’s ‘third act’ has been to transform Hanlong into a major player in the natural resources area. Starting with investments in lead and zinc, he bought a gold mine in 2006 and in 2009 acquired a controlling stake in Moly Metals. At the time the $200 million deal was the largest purchase by a Chinese private sector firm in Australia.
So Liu evidently had form when he went after Sundance. His involvement began after the firm’s biggest shareholder Ken Talbot died in a plane crash in Cameroon. The family’s trust expressed an interest in selling, and in March this year Liu bought its 16% holding.
He then acquired 3% more of Sundance in the open market.
Liu was now in a position to shape the firm’s future, as well as block others who might try to acquire it. But he wanted the full takeover.
It hasn’t been straightforward. In the period between the tender offer and this week’s newly agreed price, three executives from a Hanlong subsidiary were investigated in Australia for insider trading (one of the stocks was Sundance). The Oriental Morning Post reports that the three employees have resigned.
Any embarrassment will be overlooked if the Sundance transaction proves as transformational for Hanlong as it hopes. The Mbalam mine, Hanlong claims, could (eventually) turn it into the world’s fifth-largest iron ore miner.
This tallies too with the strategy of Chinese policymakers. They want to diversify ore supply and undermine what they regard as the oligopoly of leading producers BHP, Rio and Vale.
China’s steelmakers have suffered a series of reverses in their price negotiations with the foreign miners and senior figures now want to see 40% of ore coming from Chinese-owned mines by 2015 (see WiC95).
That alignment of interests should help Hanlong with the broader funding needed for the Mbalam mine. 21CN reckons that as much as $7.8 billion will be required to pay for the project’s two phases. This covers the development of the mine itself, as well as the cost of the rail line and port that will be needed to get the ore out of Africa.
Last year, Hanlong opened lines of credit with the Export-Import Bank of China and China Development Bank, and both institutions will be expected to be involved in the Sundance transaction.
It’s speculated too that Liu might find help in the shape of his cousin, Liu Canglong, the tycoon behind Sichuan Hongda, also a major player in natural resources. Plus other Chinese entities – such as steelmakers – could show an interest.
Although financing is one of Liu’s more immediate priorities, probably the longer-term concern is the political risk of doing business in Africa. Events in Libya and elsewhere on the continent have made that more apparent in recent months to Chinese bosses.
But Liu has taken risks before. And on this occasion he’s buying at a time in which global markets are down on their luck, with growing talk of recession and financial crisis.
It might be the ideal time to act – and fast. Remember back in 2009 when Chinalco tried to double its stake in Rio Tinto? That was also during a time of crisis in which the Chinese party looked well-placed to capitalise on a cash-crunch facing the Anglo-Australian miner. The $19.5 billion deal would have also seen the Chinese firm increase its stake to 18% and get minority holdings in a number of Rio’s world-class mines.
But the bid collapsed when commodity prices recovered (ironically largely because of a wave of new demand triggered by China’s own stimulus spending programme) and Rio pulled out.
Li Daokui, professor at the School of Economics and Management at Tsinghua University, told the Beijing News at the time that Chinalco waited too long and failed to press home its early negotiating position (see WiC19). This time round the lesson may have been learned. Neither Minmetals nor Hanlong seem to have regarded all the wider talk of pending financial default and economic crisis as a reason to delay…
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