SYDNEY, Australia: Wei Zhang, chancellor to
China's seventh-century Emperor Tang Taizong, reputedly told
his master to "use history as a mirror." China's modern-day
minerals mandarins could benefit from this advice as they look
to secure supplies through investments in Australia and
China has long favored Australia's resource sector, never
more so than last year when cash-strapped Aussie miners sought
Chinese funds to stay afloat. But while the economic benefits
to both parties seem undeniable, the execution has been largely
unsuccessful, with two high-profile cases demonstrating the
uneasy path Chinese investment faces Down Under.
Australia, one of the world's top exporters of iron ore and
other commodities, has ridden out the economic downturn better
than most, thanks in part to its proximity to China. But the
financial crisis and steep drop in commodity prices in late
2008 and early 2009 had a major impact on miners.
"For the first part of the year companies would have to sell
their souls to get financing, and banks were calling in loans
because a lot were expiring in 2009," said Thomas Booth,
commodities trader with Novus Capital in Sydney, Australia.
"Some companies were called to repay the debt even if they
were able to service it," Peter Arden, senior research analyst
at ORD Minnett, said.
The poster child for Australia's unforgiving credit
environment last year was copper-zinc miner OZ Minerals Ltd.
The company was a few months away from production at its
Prominent Hill copper-gold mine in Western Australia when
trading in its stock was suspended because the company couldn't
roll over its debt.
OZ Minerals grasped for an international lifeline, which
came in the form of an Australian $2.6-billion ($2.4-billion)
all-cash buyout offer from China Minmetals Corp., one of
China's biggest metal trading houses. The deal valued OZ at
A82.5 cents (75.1 cents) a share-a 50-percent premium to its
last traded price.
But Australian Treasurer Wayne Swan blocked the deal, saying
the sale of Prominent Hill posed a security risk because the
mine was too close to the Woomera weapons-testing range, a key
Australian defense asset. The Australian resource community
largely mocked Swan's "defense asset" explanation, but the
rebuff proved that, despite dire market conditions, Chinese
direct investments still face an unpredictable regulatory
Undeterred, Minmetals quickly returned with a successful
offer of nearly $1.39 billion for all OZ Minerals' assets
excluding Prominent Hill, indicating-as have a raft of other
overseas investments in recent years-that China is serious
about securing raw material supplies.
China's hunger for commodities stems from the country's
impoverished geology, and it has made minerals security a top
priority. The Asian powerhouse is pursuing this goal with a
three-pronged approach: domestic exploration; strategic
stockpiling; and investments in foreign projects and companies.
But the success of domestic exploration is limited by geology,
and storing bulk dry goods can be uneconomic, especially in the
case of iron ore, according to Citigroup global commodity
analyst Alan Heap. That leaves investment as the best possible
strategy, and China has aggressively bid for mining assets in
Australia and Africa, where it recently displaced the World
Bank as the biggest grantor.
African investments require aid and infrastructure
expenditures, however, and come parceled with security and
political risks. Similar Australian ventures do not share such
burdens. Moreover, Australia's proximity to China makes for
reduced transportation costs.
The relationship between the two countries is symbiotic, as
the Australian resource sector would stall without Chinese
funds and China's voracious appetite for commodities. Even so,
China's bulldozer attempts to scoop up entire companies or
major assets were met with distrust and disdain by the
Australian resource community.
China's second troubled Australian investment in recent
years was the attempt by state-owned Aluminum Corp. of China
(Chinalco) to buy into Rio Tinto. Chinalco's $19.5-billion bid
for Rio, which had $10 billion of a $40-billion loan due in
early 2009, included the purchase of convertible bonds for $9.2
billion, which could have yielded Chinalco an 18-percent equity
stake in the Anglo-Australian miner. More alarming was the
$12.3 billion earmarked to turn some of Rio's iron ore, copper
and aluminum assets into joint ventures. The deal would have
handed government-held Chinalco direct stakes in some of Rio's
prime assets. But market conditions improved and Rio scrapped
China is not the first resource-poor nation seeking to
secure mineral supplies from Australia. Japanese commodity
trading houses embarked on a similar path in the 1970s, with
Mitsubishi Corp., Mitsui Group and Marubeni Corp. buying equity
stakes in foreign miners to help develop new projects. But the
Japanese employed a deft touch-the typical deal involved a
small equity stake of 5 to 10 percent, a board seat, and often
an off-take agreement that ensured mineral supplies. The
strategy rewarded Japan with relative minerals security, and
today the trading houses cumulatively hold around 4 percent of
world copper supply, or 49 percent of the country's copper
demand, according to Citigroup.
Since China looks forward to decades of resource-driven
economic growth, it stands to improve its chances of
accumulating stakes in Australian miners by mirroring Japan's
subtle tactics. TATYANA SHUMSKY