Summary

Chinese investors are taking note of Australian resource companies operating strategically in Africa. Belinda Fan, Partner and Monika Aronfeld, Solicitor discuss the recent trend of Chinese companies investing in Australian companies with African resource operations, and analyse key trends in this space. The recent policy changes implemented by China’s National Development and Reform Commission (NDRC), and the influence of the China Africa Development Fund (CADFund), will also be discussed in this context.

Foreign investment in Africa

The future is promising for resource-rich Africa. Sub-Saharan Africa in particular continues to record strong economic growth, and the region’s gross domestic product is expected to continue to grow by approximately 5% during 2013.1 The cumulative annual revenue of the African resource, agriculture, infrastructure and consumer industries is projected to reach US$2.6 trillion by 2020, with the resources industry expected to account for US$540 billion of this amount.2 The International Monetary Fund attributes the continued strong economic conditions in the region to robust commodity prices and new resource exploitation.3

Investors worldwide are buying into the opportunities on offer in Africa. In 2011, foreign direct investment (FDI) flows into Africa were valued at approximately US$43 billion, and the projected figures for FDI inflows in 2012 are between US$55 and US$65 billion.4 Importantly, FDI flows into sub-Saharan Africa increased by 23% from US$29.5 billion in 2010 to US$36.9 billion in 2011, a level comparable with their peak in 2008 at US$37.3 billion.5 The United Nations Conference on Trade and Development predicts, in its annual World Investment Report 2012, that FDI flows into Africa in 2013 and 2014 are set to rise to US$85 billion and US$100 billion respectively.6

Australia – an investment nexus

Australia’s position as a gateway into Africa is a natural and productive progression of the current investment trends between the two countries. Chinese companies, particularly those with no prior African dealings, are attracted to the reduced risk associated with investment in Australian companies with established projects, experience and presence in Africa. Australian mining companies find Chinese entities’ access to funding appealing, particularly in the current depressed equity and debt market global landscape.

In addition, Australian resource companies are a well-positioned nexus between Chinese investors and African projects primarily as:

  • Australians have significant expertise and experience in developing resource projects located in developing countries and challenging conditions.
  • Australia’s investment presence in Africa is well-established and actively encouraged by the Australian government. Over 200 Australian resource companies have almost 600 projects in Africa, spread across 42 countries. The Australian Department of Foreign Affairs estimates that current and prospective Australian investment in Africa totals more than US$20 billion.7
  • Australian resource companies have actively sought good relations with their host countries when operating in Africa. For example, Anvil Mining who have been producing copper in the Democratic Republic of Congo since 2002, have sponsored local education, micro-enterprise initiatives and public infrastructure. In Cameroon, Rio Tinto has partnered with the government on the Alucam smelter for the last 53 years. This project has funded the provision of water wells, scholarships and medical assistance.
  • Chinese/Australian collaboration in the resources industry is of strategic importance for both countries. KPMG, in its Demystifying Chinese Investment 2012 survey, estimates that Chinese entities invested approximately US$45 billion in Australian businesses between 2006 and 2012. Almost 80% of this figure was directed into mining industries, and a further 12% into the oil and gas sector.

Recent Transactions

The table below contains key details of four recent Chinese investments into Australian resource companies active in Africa.8

Click here to view table.

Chinese/Australian/African investments trends

Off-market bids

All the transactions analysed above were off-market takeovers of Australian Securities Exchange (ASX) listed companies. Off-market transaction structures are common in Australia. An off-market bid sees an offeror make individual offers to each security holder on identical terms. These types of bids are often favoured by investors as they are more flexible than their on-market counterparts.

Increasing reliance on Australian experience

Australian mining companies are known for their mature market economics, advanced mining technologies and project development expertise in developing countries, all of which are appealing to Chinese investors looking to expand their African investment portfolios.  

Effective Chinese entrants have sought to build on the experience of Australian local management, recognising the importance of strong local Australian partners, employees and stakeholder relations.

Successful cases include MMG (formerly Minmetals), which retained OZ Minerals’ management, including the current chief executive officer Andrew Michelmore, following its takeover of OZ Minerals’ assets in 2009. The management team then guided the Chinese-owned company through the strategic acquisition of Anvil Mining, and its African copper assets, in 2012.

On the other hand, recent news regarding Yancoal Australia’s departing chief executive officer serves as a reminder that just as ‘every family has its own scripture to recite’, every Chinese-Australian management partnership has its own trials and tribulations to confront.

Enter the Chinese private equity firm

China has a solid track record of utilising state owned entities (SOEs) when investing in Australia. Traditionally SOEs prefer to invest in ASX listed companies.9 The enhanced transparency of listed companies is considered to be an appealing factor in target selection, particularly given SOEs’ inherent sensitivity to potential investment risks.

Recently Australia has seen Chinese private equity firms take a more active role in foreign investment; Cathay Fortune Corporation’s bid for Discovery Metals being a notable example. The recent policy changes put forward by the NDRC are a key driver of this trend.

In June 2012 the NDRC, working with 12 Chinese government departments, created a suite of policies which represent a lessening of the regulation surrounding outbound foreign investment, and an increase of the ease with which Chinese private equity firms can access finance for African projects.

The new policies are a combination of tax relief and credit support that generally encourage privately owned Chinese companies to invest in overseas projects. Central tenets of the new policies include:

  • providing tax relief to private firms that pay income tax abroad;
  • encouraging Chinese banks to offer working capital loans, syndicated loans, export credit and other finance to assist private companies in outbound investment;
  • encouraging certain private enterprises to issue bonds in the international financial market; and
  • simplifying the processes governing outbound foreign exchange and customs clearance.10

The CAD Fund – a key to Chinese investment in Africa

The CAD Fund, a specialist sovereign wealth fund designed to foster African development, plays a central role in fostering Chinese investment into Africa. The CAD Fund was established in 2006 with a US$1 billion endowment. In 2009, US$140 million of China's total US$1.3 billion investment in Africa was made by the CAD Fund. By 2010 the CAD Fund had invested in 30 projects in Africa worth approximately US$800 million. The Chinese government has plans to expand the fund to US$5 billion. Considering its financial prominence, there is little doubt that the CAD Fund will continue to play a key role in the Sino-African investment landscape.

The CAD Fund’s investment philosophy is to foster Sino-African trade cooperation through market based mechanisms. It markets itself as an independently operated fund which selects projects at its own discretion, and according to investment policies determined by its board of directors. A key principle of the CAD Fund is to ‘encourage and support further Chinese Enterprises to invest in Africa’.11

The CAD Fund generally does not require a majority interest or a role in day-to-day operations, but it will seek active participation in management in the form of director/management appointments. In Australia, the CAD Funds recently formed alliances with Cathay Fortune and China Guangdong Nuclear Power Group to launch joint bids for Discovery Metals and Extract Resources respectively. In each case, the CAD Fund sought a minority stake of a sufficient size (25% and 40% respectively) to facilitate board and management participation.

A bold future

Australia holds the enviable position of being China’s gateway to Africa. Sino-Australian-African investment activities are evolving. Whilst SOEs will continue to dominate, we expect to see a growing presence of Chinese private enterprises supported by Chinese funds and banks. Chinese FDI in Australia is continuing to move into a more mature phase. Bolder entry strategies, such as the attempted hostile takeover of Discovery Metals by Cathay Fortune, may well become a common occurrence.

Those who wish to attract, or defend against, Chinese acquisition bids would benefit from studying the policies and strategies of key Chinese stakeholders, including those of the CAD Fund and the NDRC.

Of course, this is nothing new for those familiar with the works of Sun Tzu.