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Chinese acquirers find a route to Africa via Australia

by Eric Vermilya  |  Published November 13, 2012 at 3:44 PM
With more than $500 billion at their disposal, Chinese sovereign wealth funds can flex financial muscle with ease. But their strength is usually cloaked in cloying words of warmth and friendship. That's what made the hostile bid last month for an Australian-owned, African copper mining concern so jarring.

"For a Chinese sovereign to partner with a strategic interest and go hostile, it's a first," says Jinshu Zhang, a Los Angeles-based partner with Reed Smith LLP, and the senior director of the firm's Asia-Pacific practice.

As shareholders of embattled Discovery Metals Ltd. descend on Brisbane, Australia, Friday, Nov. 16, for the annual general meeting, they must ponder the intent, strategy and financial firepower of China-Africa Investment Fund and its private equity firm partner Cathay Fortune Corp. The pair bid A$830 million ($855 million) for Discovery, an offer the mining concern's board rejected as inadequate.

Most attention has been focused on Cathay Fortune and its rich and politically well-connected chairman, Yu Yong. Under its proposal, Cathay Fortune would own 75% of Discovery, which is listed on Australian stock exchanges, but whose assets are in Africa: A copper field in Botswana.

Especially intriguing, though, is the role of China-Africa Investment Fund. After all, the vehicle was set up five years back as a specialist sovereign wealth fund to foster African development.

China-Africa Investment "is not totally, financially driven," says Zhang, who has advised Chinese sovereign wealth funds in the past, although not China-Africa Investment. The lawyer describes what he calls the fund's "distinct mandate": First, to help African countries; second, to secure for China supplies of natural resources; and only third, "to make money."

That Cathay Fortune and China-Africa Investment have gone hostile is a calculated bet that some observers believe will most likely be resolved by a sweetened bid. But it also reflects a growing awareness by Chinese interests of how the takeover game is played and a budding confidence to play the game hard. "It marks the maturity of Chinese investment managers," Zhang believes, although he is quick to add that Chinese sovereign wealth managers remain "extremely risk adverse."

China-Africa Investment's willingness to mount a hostile bid of Discovery Metals raises broader questions as well not only about Chinese sovereign wealth funds, but about other Chinese-government allied investors in general. The Discovery Metals bid comes as several Chinese interests mount high-profile takeovers of other natural resources concerns.

Canada is one big focus. China National Offshore Oil Corp., or Cnooc, in July offered to acquire Nexen Inc. for $15.1 billion in cash. The Canadian government is reviewing the proposed acquisition of Canada's sixth-largest oil producer and said it will make a decision by the middle of next month. While the offer is friendly, political opposition to the acquisition is mounting and there's growing belief that the government will reject the bid, citing national security interests.

Australia is also very much on Chinese radar. Late last month, for example, a joint venture led by a subsidiary of China Yima Coal Group made a friendly A$71 million cash offer for publicly traded coal exploration company Endocoal Ltd.

China's single biggest investment came in 2009, when Yanzhou Coal Mining Co. paid A$3.5 billion for Australian coal company Felix Resources. That deal was conditional on Yancoal Australia listing in Australia, which it did in June 2012.

African governments have enthusiastically welcomed Chinese investments, even if the money barely conceals China's avaricious appetite for natural resources. China is the biggest benefactor, for example, of a new $3.2 billion Ethiopian rail line being built to link the northern part of the country with Djibouti's Port Tadjourah, a line necessary to move potash.

Using Australian-listed companies as a backdoor entry into Africa is becoming a more common vehicle for Chinese interests as of late. Most notably, Sichuan Hanlong Group has offered A$1.2 billion for the 81.4% stake it doesn't already own in Sundance Resources Ltd., a Perth-based company that owns an iron ore mining and development company in West Africa. That offer is pending.

But there's resistance to this increasingly aggressive strategy, and one that also can result in a popular backlash. On Nov. 7, shareholders in the Australian gold mining company Noble Mineral Resources Ltd. narrowly rejected an A$84.7 million offer from Zhongrun Resources Investment Corp., which would have resulted in the Chinese mining concern holding a controlling 41.5% share. As part of the deal, Zhongrun was to acquire options for another 10% stake in the company developing a gold field in Ghana.

(After the defeat, Noble immediately accepted a rival $A85 million finance packaging from another publicly traded Australian company, Resolute Mining Ltd. Resolute owns a gold field in nearby Mali.)

Despite the setback, Chinese officials are likely to remain committed to the strategy. The Africa-focused wealth fund can be traced to a 2006 summit in China with various African leaders. China Development Bank established China-Africa Investment a year later with a modest $1 billion initial investment and a promise of $4 billion more to come. According to the Discovery takeover offer document, China-Africa now has $3 billion in paid-up capital.

That's a pittance compared with the country's largest sovereign wealth fund, China Investment Corp., with capital now approaching $500 billion.

China-Africa Investment offers little insight into its investments and hard numbers are difficult to come by. According to its website, the fund invests in debt as well as equity.

Original pronouncements aside, the vehicle offers no evidence of altruistic investments designed to boost local companies and indigenous talent. Publicly disclosed investments so far have been minority stakes in ventures partnered by other Chinese entities with specific operating expertise. For example, China-Africa Investment owns 13.7% of Zimasco (Pty) Ltd., a ferrochrome producer in Zimbabwe. Sinosteel Corp. acquired a controlling stake in Zimasco in late 2007.

Cathay Fortune falls into that category, even if it is a private equity concern. Its biggest holding to date is a 35.5% stake -- currently valued at $1.9 billion -- in China Molybdenum Co. Ltd. The company is one of the world's largest producers of molybdenum, used primarily in steel alloys. Cathay Fortune already owns 13.78% of Discovery Metals.

Tags: Cathay Fortune Corp. | China Investment Corp. | China Molybdenum Co. Ltd. | China National Offshore Oil Corp. | China Yima Coal Group | China-Africa Investment Fund | Cnooc | Discovery Metals Ltd. | Endocoal Ltd. | Felix Resources | Jinshu Zhang | molybdenum | Nexen Inc. | Noble Mineral Resources Ltd. | Port Tadjourah | potash | Reed Smith LLP | Resolute Mining Ltd. | Sichuan Hanlong Group | Sinosteel Corp. | sovereign wealth fund | Sundance Resources Ltd. | SWF | Yanzhou Coal Mining Co. | Yu Yong | Zhongrun Resources Investment Corp. | Zimasco (Pty) Ltd.

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Eric Vermilya

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