A loader prepares to shovel iron ore dug from an Australian mine in this undated handout picture from Port Hedland. BHP Billiton and other Australian miners sell hundreds of millions of tonnes of ore annually to steel mills worldwide. This year China's steelmakers want a big discount to compensate for weaker steel sales at home.REUTERS/BHP Billiton
When China Minmetals Corp. backed away from its hostile bid to take over Canadian-Australian mining company Equinox Minerals Ltd. recently, it did not disappear. Its CEO, Andrew Michelmore, told reporters that the $7.3-billion offered up by Toronto-based Barrick Gold Corp. was too rich to counter.
Then, it went hunting for other opportunities.
Armed with trillions in foreign reserves and a mandate to secure natural resources around the world to feed its insatiable domestic engine, the Chinese are on the prowl for deals. And Canadian mining companies may soon be experts in striking them.
China's state-owned enterprises are injecting millions into Canadian mining companies seeking to build out new mines. As a signal of future intentions, this year China Investment Corp., a sovereign wealth fund with $300-billion in assets, opened its first foreign office - in Toronto.
It's boom times for the sellers, who are already basking in sky-high commodity prices that show no sign of falling. But for Canadian bidders coming up against the new investor on the block, these are frustrating times.
"On a lot of the deals we work on here, many of which are international in scope, a looming concern for buyers or investors is that the Chinese, with huge pools of endless capital, will come in and scoop it up," says Dawn Whittaker, global mining leader at the Toronto-based law firm Ogilvy Renault. "There's this feeling that you have to move fast and get what you want before the Chinese come in and trump your bid."
China's explosion onto the global mining scene has shaken up the mergers and acquisition dynamic. The new buyer on the block ponies up straight cash, has a long-term horizon - which typically means greater risk tolerance - and has little interest in running the entire company.
The deal process may be tedious and the questions endless, but that's a mere annoyance.
In fact, Canadian mining companies and the lawyers, accountants and bankers who advise them are structuring deals - and spinning out companies - with Chinese investors in mind.
From copper to molybdenum to potash, China is now one of the world's largest importers of metals and minerals as it struggles to keep up with economic growth from its rapidly expanding middle class. In addition, its huge manufacturing sector supplies corporations around the world.
Industry experts say the Canada-China relationship will only deepen.
"Canada is a great incubator for mining exploration and early-stage mine development, but it takes tremendous capital and investment in R&D to move to the next stage and develop a mine," says Christopher Murray, an M&A lawyer at Osler, Hoskin & Harcourt LLP and head of its China practice. "China can come in and do that. They come in with a much-needed infusion of capital when many of our companies top out."
In 2009, the Chinese government declared that it intended to use its huge foreign exchange reserves, valued at $2.85-trillion, to expand operations overseas, primarily through acquisitions. Chinese officials said they'd focus on buying access to natural resources to fuel China's exploding economy and urbanization.
China's state-owned enterprises (SOEs), sovereign wealth funds and some private companies are not wasting time.
In 2009, CIC invested $1.5-billion for a 17.2-per-cent stake of Vancouver-based Teck Resources Ltd. A month later, the Aluminum Corp. of China picked up Peru Copper Inc., a Canadian miner with assets in South America, for $779-million.
Last year, China's CRCC-Tongguan Investment Co. bought Vancouver's Corriente Resources Inc. for $549-million.
The Chinese deals don't just reflect a brand new source of capital for Canadian miners. They're different in other ways, too, say experts.
First, they're almost always cash deals. China's SOEs and sovereign wealth funds are private and don't have shares to offer. Plus, the government's goal is to diversify a portion of its foreign exchange reserves out of U.S. dollars.
Second, the Chinese, while they have acquired a few companies outright, are more interested in buying specific properties, or taking a minority interest in a company with the goal of securing supply from one of its properties.
There's another difference: Chinese investors typically engage in a more extensive due diligence process than North American bidders. In response, Canadian mining companies in search of cash are catering to China's needs, says Sanjay Joshi, a partner and China expert with Ogilvy Renault in Toronto.
"They're making sure policies and procedures are in place and on paper - ready to be seen when the Chinese hire people to do due diligence," says Mr. Joshi. "The Chinese are more deliberate in how they look at deals and how they decide to pull the trigger."
Fred Pletcher, a partner and head of the national mining group at Vancouver-based Borden Ladner Gervais LLP, says the Chinese SOEs have become a central player in the global mining deal making scene. The industry in Canada, in turn, is responding.
"We've amended our structures and strategic review process to take into account their due diligence, their necessity to obtain internal approvals," says Mr. Pletcher of the mining clients he works with. "We've actually changed our auction and sale processes with China in mind."
This is all good news for miners seeking a cash injection, but troubling for large Canadian companies eyeing the same investments - both here and overseas.
"There's a new competitor out there who plays by a different set of rules and metrics," says Mr. Pletcher. "Their mandate is to secure long-term resources for domestic use in China. They also have financing capabilities that most majors would be envious of."
This competitive disadvantage deepens even further when Canadian majors find themselves bidding against China for exploration properties in developing countries.
"It's what other Chinese organizations are doing in those markets that matters, too," says Mr. Pletcher, who monitors China's efforts in Africa and South America. "Other arms of the state could be doing infrastructure projects, developing roads, working on agriculture projects - and this overall package can be very attractive."
Special to The Globe and Mail