China has made its first-ever hostile bid for a major Canadian mining company, signalling a bold shift in strategy as it seeks to sate its appetite for resources to fuel its rapidly growing economy.
A subsidiary of state-owned China Minmetals Corp is offering $6.3-billion in cash for Toronto-based copper producer Equinox Minerals Ltd. , which operates a copper mine in Africa and is developing another in the Middle East.
China, the world's largest consumer of commodities, has been going on an acquisition binge around the world and using Canadian companies to secure long-term reserves. But until this historic, aggressive bid, China was more friendly, for fear of raising political hackles.
This offer will put Investment Canada to the test, particularly in the midst of a Canadian federal election. A spokesperson for Industry Minister Tony Clement said officials at Industry Canada are looking into how the Investment Canada Act applies to the proposed transaction.
Minmetals expects its bid will pass Ottawa's net-benefit test because Equinox does not have assets in Canada, and most of the jobs are outside the country. Still, the offer is expected to trigger some controversy about foreign entities seeking to acquire Canadian-based resource companies, particularly after Ottawa's rejection last fall of BHP Billiton Ltd.'s $39-billion bid for Potash Corp. of Saskatchewan Inc.
The hostile bid, announced late Sunday, also represents a coming of age for China in the takeover arena. In the past, Chinese firms have been faulted for delays and confusion, but its surprising pursuit of Equinox appears to reflect a new willingness to apply tougher takeover tactics that are the norm in the Western world.
While Minmetals said it has been looking at Equinox for about a year, it decided to move now in order to thwart Equinox's $4.8-billion hostile bid for Lundin Mining Corp. ahead of a crucial shareholder vote on April 11.
Lundin, which has assets in Europe and Africa, has rejected the Equinox offer and is now considering selling all or some of its assets to others after its merger with fellow Toronto-based miner Inmet Mining Corp. fell apart last week.
Equinox is based in Toronto but its top executives live in Australia. The company trades on both the Australian and Toronto stock exchanges.
Equinox executives were taken off guard by the announcement and responded late Sunday saying it will review the $7-per-share offer and won't comment further until it is carefully reviewed by the board. The price is a 23-per-cent premium to Equinox's closing price Friday of $5.71 on the Toronto Stock Exchange.
Minmetals' move for Equinox lays the groundwork for a complex chess match involving a number of suitors who are vying for the world's copper riches.
In the face of federal backbench opposition in Canada and insufficient support in China, Minmetals walked away from plans to bid for Canadian miner Noranda in 2004. China National Offshore Oil Corp. withdrew an $18.5-billion (U.S.) bid for oil producer Unocal in 2005 after the offer created a political firestorm in Washington.
The hostile bid for Equinox sends a strong signal that they are willing to play the game like other acquirers.
"The Chinese are becoming sophisticated takeover investors and they may have a number of strategies in mind with this announcement," said one takeover expert. China also enjoys an advantage over private companies, since Minmetals is state owned and backed by the country's roaring economy and enviable fiscal strength.
Hong Kong-listed Minmetals said its play for Equinox's mines in Zambia and newly acquired project in Saudi Arabia marks its first investment into the African copper belt and the Middle East.
Minmetals said investment into both regions is consistent with its long-term strategic growth plans and more than doubles its exposure to what it called the "attractive fundamentals of the copper market."
Equinox's Lumwana mine in Zambia produces about 145,000 tonnes of copper annually, with a 37-year mine life. Equinox has also said the mine could expand to 260,000 tonnes annually within the next five years.
Equinox also recently took over the Jabal Sayid project in Saudi Arabia through a recent acquisition. The project, set to begin production in 2012, has a forecasted average copper production of 60,000 tonnes per year.
Minmetals said it will fund the purchase using both existing cash reserves, long-term credit facilities from Chinese banks and equity, which includes financial investments in the company by Chinese institutions. Minmetals already owns 4.2 per cent of Equinox's shares.
"We regard this transaction as an important next step in MMR's transformation into a leading upstream base metals company," China Minmetals president Zhou Zhongshu said in a statement.