China’s appetite for foreign mining and energy companies continues to grow. Outbound foreign direct investment (OFDI) from China reached US$55 billion in 2008, a 19.4 percent increase compared to 2007, with the bulk of this investment aimed at mining and energy companies. The pace has continued into 2009. Deals or takeover announcements have included:
- the Sinopec takeover of Addax Petroleum in an $8 billion friendly takeover that recently closed;
- a passive investment by China Investment Corporation (CIC) via the purchase of a 17% subordinated share interest (which excludes board representation) in Teck Resources;
- a $148.5 million unsolicited takeover bid for Canadian Royalties Inc. by statecontrolled Jilin Jien Nickel Industry Co. Ltd in August.
As can be seen, Chinese enterprises – whether state owned or private – are employing a wider range of tactics in order to achieve acquisition objectives. The Chinese government is also simplifying the approvals process required for foreign acquisitions and is implementing policies enabling financing alternatives for Chinese enterprises that are carrying out overseas takeovers in the mining and energy sectors. The following are several changes which could enable further Chinese take-over activity in the mining and energy sectors:
MOFCOM Approvals. On March 16, 2009, the Ministry of Commerce (“MOFCOM”) promulgated the Rules for the Administration of Outbound Investments (the “New Outbound Rules”). The New Outbound Rules delegate approval for deals under US$100 million to local MOFCOM authorities, whereas previously all deals required central approval from MOFCOM in Beijing. Where deals fall below the US$100 million threshold applicants will be able to file applications on-line and approvals will be reviewed within three working days. In practice this means that a significant delay for deals involving mining companies where the dollar value is under US$100 million will be removed. While other approvals are still required (such as National Development and Reform Commission approval), the simplification of MOFCOM approvals will make transactions easier to carry out. In addition to the big strategic mineral deals expect to see a flurry of smaller, off-theradar- screen, resource deals.
SAFE Capital Controls. The State Administration of Foreign Exchange (“SAFE”) issued the Administrative Rules for the Foreign Exchange Administration of Domestic Enterprises’ Overseas Direct Investments (the “Foreign Exchange Rules”) on July 13, 2009. In addition to simplifying the approvals process, the Foreign Exchange Rules relax capital controls and provide for easier access to foreign exchange for Chinese companies and creates more opportunities to raise capital.
Debt Financing. On December 9, 2008, the China Banking Regulatory Commission (“CBRC”) issued the new Guidelines for Risk Management of Merger and Acquisition Loans by Commercial Banks (the “Guidelines”). The Guidelines are significant because they allow Chinese commercial banks to lend money for crossborder mergers and acquisitions. In addition to Chinese bank financing, the issuance of dollar denominated bonds in China by Chinese companies was permitted for the first time in 2009 with the issuance by China National Petroleum Company of up to US$3 billion in 3-year floating bonds in the Shanghai interbank market. Practically speaking, this means that more financing options are available for Chinese companies engaged in overseas takeovers of mining companies.
Investment Arm. The China Development Bank (“CDB”) announced recently that it would set up a US$5.1 billion investment arm (the “Unit”) to focus on private equity deals. A number of assets would be rolled into the Unit including CDB’s Chinalco and Jinchuan Group (China’s largest nickel producer) stakes. This is a significant development as traditionally Chinese policy banks, such as CDB, have been passive investors preferring small non-active stakes in target companies. The creation of the Unit could allow for a more aggressive pursuit of mining company targets in line with overall state objectives of natural resource acquisitions.
The combination of loosened state controls over overseas investments (especially over investments of under US$100 million), the introduction of new entities having the remit to invest and act aggressively in the natural resources sphere and the employment of a wider variety of tactics including hostile take-overs by Chinese entities in deals involving mining companies means that mining companies should be more aware than ever about opportunities involving Chinese companies and plan accordingly.