I hold no particular brief for China but, having studied its culture and
language pretty intensively some years ago when writing my dictionary, I
reckon that I know the Chinese personality as well as, say, I know the
German or the American. What I would suggest is that, whatever may happen
to Western Europe or America in the imminent future -- long term-deflation
or catastrophic hyper-inflation -- China will still survive in far better
shape, just it did (and still does) in the aftermath of the 2008/9 credit
crunch.
The Chinese government is, of course, capable of making mistakes, but only
twice in the last few decades since Deng Xiaoping's administrative and
economic reforms has it failed to reach a 10% annual growth target. I've
little doubt that it will continue to do so. It might be badly affected by
our problems along the way but, since China knows what our main problem is
(our paper currencies) -- having suffered from their own paper currency a
thousand years ago -- I think China will be able to activate a new trading
currency and a sufficiently large consumer market to take the place of any
decline in Western Europe or America.
The following article from the Wall Street Journal two days ago is salutary
to any Western reader -- at least to anybody with the intelligence and
objectivity to see the world as it really is.
Keith
<<<<
CHINESE FIRMS SNAP UP MINING ASSETS
Phred Dvorak
In the global hunt for mining assets, China has emerged as the buyer to
beat: Just a few years after suffering high-profile failures to close big
acquisitions, Chinese buyers of all sizes are sealing more sophisticated
deals at a higher rate of success.
Digging In
Companies based in China or Hong Kong participated in $13 billion of
outbound mining acquisitions and investments last year 100 times the level
in 2005, according to data tracker Dealogic.
China-based companies are on a similar pace in 2010. Last week, Shandong
Iron & Steel Group Co. announced a $1.5 billion investment into an African
Minerals Ltd. iron-ore project in Sierra Leone, the latest of 76 outbound
mining deals announced by China-based buyers so far this year, valued at
$8.3 billion, according to Dealogic.
China's hunger for metals and minerals will be a principal driver in
boosting its overall outbound investment to more than $100 billion in 2014,
predicts Derek Scissors, a Heritage Foundation researcher who has built a
database to track those deals.
China's success in snapping up makers of iron ore, nickel, molybdenum and
other minerals has come as much of the world smarted from the global
financial crisis. In 2009, China accounted for one-third of the value of
all cross-border mining mergers and acquisitions, up from 7.4% in 2007 and
less than 1% in 2004, Dealogic found.
In Australia, historically a major destination for Chinese mining
investments, Chinese acquirers accounted for nearly 40% of all inbound
mining deals last year, according to PricewaterhouseCoopers annual review
of mining M&A. In Canada, a newer market for Chinese buyers, the number was
around one-quarter.
The latest deals introduce a new class of suitors.
In years past, Chinese buyers of overseas oil and ore assets tended to be
big, state-owned enterprises that favored outright takeovers and got
reputations for ham-handed deal makingsuffering a series of public
rejections, such as China Minmetals Corp.'s failed attempt to buy Canadian
miner Noranda Inc. in 2005.
These days, potential investors range from private manufacturers to Hong
Kong investors to China's sovereign-wealth fund, China Investment Corp.
China deal trackers say those investors are savvier and more flexible than
they were a few years ago, experimenting with joint ventures and minority
stakes.
Just a year ago, Hong Kong-based CST Mining Group Ltd. was China Sci-Tech
Holdings Ltd., a 15-person Hong Kong public company investing principally
in real estate. Earlier this year, it bought two copper miners for $380
millionone Canadian, one Australianhired a bunch of Western mining veterans
to run them, raised $600 million through a private share placement and
changed its name to CST Mining Group Ltd.
Chinese investors are finding "more and more kinds of ways to get business
from the world,'' says Amy Cheng, CST's banker and the mining-team leader
for BOC International, the investment banking arm of state-owned Bank of
China Ltd.
Ms. Cheng estimates Chinese mining investors were successful last year at
closing around three-quarters of the deals they attempted; a few years ago,
she says, they were rebuffed nearly all of the time. The financial crisis
provided an opening.
"Every project [that wants money] looks at Chinese companies," she said.
The Chinese government hasn't made a public push for these acquisitions,
but the explosion of deals in recent years, many by state-owned companies,
suggests they are a priority.
China already consumes one-third of the world's copper and 40% of its base
metals, and produces half of the world's steel. Though demand for
commodities has eased a bit as the pace of China's growth has slowed this
year, it is expected to stay strong in the long term.
China has complained that foreign companies have charged too much for iron
ore and other commodities, a concern that became acute in 2007 when the
world's No. 1 miner, BHP Billiton Ltd., attempted to buy Rio Tinto in a
deal that promised to create a united minerals supplier with enormous
pricing power.
The bid failed, but shortly afterward China made what remains its biggest
overseas acquisition in minerals, Chinalco's $14 billion purchase of 9% of
Rio Tinto. Buoyed by that investment, Hong Kong and Chinese firms conducted
a record $17.5 billion in outbound mining M&A in 2008, according to Dealogic.
China's buying binge could eventually increase the global supply of many
minerals and ores, says Tim Goldsmith, the Australia-based global mining
leader for PricewaterhouseCoopers, who says his job now requires him to
spend a week every month in China. If China's demand stays strong, and
other economies like India's grow rapidly as well, the added supply could
help to temper commodity-prices rises, he says.
Weaker global demand could lead to a drop in prices, a scenario Mr.
Goldsmith calls less likely. Big global miners should make out well either
way, he says, since their mines tend to be more profitable, with higher
expected returns, than those many Chinese firms are investing in.
Some Chinese investors are buying companies with mines that are at earlier
stages of development or exploration, a riskier but potentially more
profitable proposition.
"There was a time when they wouldn't invest in anything that wasn't
producing already,'' says Howard Balloch, a former Canadian ambassador to
China who founded a Beijing-based investment-banking boutique, the Balloch
Group, in 2001. Now, "the Chinese are willing to be more creative in their
investments and willing to move a little up the ladder to higher levels of
risk."
That is bringing more would-be Chinese deal makers to Toronto and
Vancouver, where much of the world's capital-raising for mining exploration
takes place.
"On the Chinese side, it's almost like someone flipped a switch a few years
ago and interest went from zero to significant investment in Canadian
firms," says David Redford, a Vancouver-based lawyer in the mining practice
of Goodmans LLC.
The interest is reciprocal: Mr. Redford estimates some 80% of his current
mining clients are looking for investment from Chinese sources. Three years
ago, he says, one-third or fewer were.
The Canadian copper miner purchased by CST, Toronto-based Chariot Resources
Ltd., found itself looking eastward for investment after its long-time
lenders pulled the plug on future financing at the end of 2008, amid the
financial crisis. The company had just finished a feasibility study on its
copper assets in Peru and needed several hundred million dollars to build a
mine. But Western bankers weren't willing to lend to a company with no
revenue or operations, says Ulli Rath, the CEO at the time.
In October 2009, Chariot's board decided to put the company up for sale.
The firm hired RBC Capital Markets, the investment banking arm of Royal
Bank of Canada, to look for suitors. On the side, one of Chariot's
directors also phoned some contacts in China: BOC International's Ms.
Cheng, and a private adviser named Ken Wang, a Chinese geologist who had
worked for years in Canada. Mr. Wang had helped broker three other deals
between North American miners and Chinese investors in the past two years.
Ms. Cheng had started BOC International's mining group in Hong Kong in
2005; she knew all the big Chinese investors as well as the state-owned
mining firms. Within a month, Ms. Cheng and Mr. Wang had arranged meetings
between five potential investors and Chariot directors in Hong Kong.
The most aggressive suitor was CST, which was just starting to transform
itself into a mining operator. Last year, the company had bought a gold
mine in Indonesia from struggling Australian miner Oz Minerals Ltd., and
hired former Rio Tinto executive Owen Hegarty to run it.
CST directors wanted to jump into copper mining as well, and saw Chariot as
a good entry, says Mr. Hegarty, who's now vice chairman of the company. In
February, CST proffered an all-cash bid of around C$245 million -- 67
Canadian cents per share. That's double what Chariot had been trading at a
few months before on the Toronto Stock Exchange, and a better deal than
other offers collected by RBC Capital Markets, says Mr. Rath, who stepped
down in June when the deal closed.
RBC Capital Markets declined comment.
In March, CST announced the purchase of the Australian copper miner; by the
end of June it had raised $600 million through private placements to fund
its purchases as well as mine development.
Ms. Cheng hired Mr. Wang in late June to work full-time with her on
resource deals.
------
Keith Hudson, Saltford, England
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