China Seeks Smaller Australian Resources Stakes, Lawyer Says

By John Duce

June 4 (Bloomberg) -- China’s state-owned companies seeking mining and energy acquisitions in Australia are opting for smaller stakes because of opposition to Chinese control of resources, a lawyer and an analyst said.

Three Chinese buyers submitted proposals to buy up to 40 percent stakes in Australian resources producers in recent weeks rather than attempting to take control, said James Philips, a mergers and acquisition lawyer at Minter Ellison. Australian opposition prompted China Minmetals Group to scale down its offer for OZ Minerals Ltd. in March.

Chinese companies attempting to buy Australian resources assets include Aluminum Corp. of China’s proposed $19.5 billion investment in Rio Tinto Group, which has yet to be approved by regulators. Some 57 percent of Australians said Chinese mining investments should be resisted because the nation’s interests would be “better served” with local ownership, according to a poll of 890 people conducted by Essential Research in April.

“I think there has been a change of tack recently by some Chinese companies,” said Peter Arden, a resource analyst at Ord Minett Ltd. based in Melbourne. “They are most interested in getting their hands on the resources and making sure that they are at the table.”

Deals approved by the Australian authorities when Chinese companies seek minority rather than majority stakes include Hunan Valin Iron & Steel Group’s successful purchase of 16.5 percent of Fortescue Metals Group Ltd. in April, according to data from Minter Ellison.

Western Mining

Western Mining Co., China’s second-largest producer of lead concentrate, was also allowed to take a 10 percent stake in Australian mineral explorer FerrAus Ltd. last year.

China Minmetals’ $1.2 billion offer for OZ Minerals’ resources was approved this month after the Chinese metal trader excluded some assets from its acquisition proposal. The revised bid excludes the Prominent Hill copper and gold mine in Australia, the Martabe operation in Indonesia and stakes in some publicly traded companies, Melbourne-based OZ Minerals, the world’s second-biggest zinc mining company, said on March 31.

“I’m sure initially some advisers said don’t be too aggressive,” Philips said in an interview in Hong Kong. “I assume that as I am seeing transactions now structured in the way I described, it’s in part because companies learned from some of the experience they have had in the Australian and international market. Perhaps a less-assertive approach might be more conducive to long-term success,” said Philips, who advises Chinese and Australian companies in acquisition talks.

Opposition to Chinese investment helped block Cnooc Ltd.’s $18.5 billion bid for El Segundo, California-based Unocal Corp. and Haier Group Corp.’s offer for U.S. appliance maker Maytag Corp. in 2005.

Cnooc’s Strategy

Fu Chengyu, Cnooc’s chairman, said on April 19 his company, China’s biggest offshore oil producer, has ruled out overseas takeovers during the global economic slowdown because of rising protectionism. Joint ventures and partnerships overseas are the most productive ways of developing resources abroad, he said.

Chinese companies are attracted to Australia because of its stable political climate and legal framework and won’t be deterred from investing by regulatory restrictions, said Philips. About 70 Chinese investments totaling some A$30 billion ($25 billion) have been approved in Australia since 2007, he said.

Overseas buyers need approval from the government to own 15 percent or more of an Australian company. Stakes acquired by foreign state-owned companies must be agreed by regulators, said Philips.

Australia is the world’s biggest shipper of coal and iron ore and China bought 44 percent of the country’s mineral exports last year. China, whose $1.95 trillion in currency reserves are the world’s largest, is buying resources to take advantage of falling commodity prices after a six-year boom ended in July last year. The country is the world’s biggest metals consumer.

“China needs access to raw materials and from the Australian end it’s welcome because it needs capital to develop projects,” Philips said. “My expectation is that investment will continue to flow.”

To contact the reporter on this story: John Duce in Hong Kong at Jduce1@bloomberg.net