Chinese interest pays big bucks

Canada is the latest geographical area that has become of interest to China for outbound mining investment.

In the course of the 2000s, Chinese investment has increased substantially in other resource-rich areas like Africa and Australia, yet Canada only became a significant target for Chinese investors in 2009. This was largely due to a re-alignment of the political alliance between the two countries, which culminated in an exchange of visits by the two countries’ heads of state in 2009 and 2010, and a re-affirmation of the “strategic relationship” that was first mooted in 2006.

Various economic factors were now able to be brought to bear to encourage Chinese investment in Canada’s mining sector, such as a favourable investment climate for Chinese investment in Canada, which welcomed large and highly capitalised Chinese mining investors hungry for natural resources that Canada was eager to supply.

For their part, Chinese investors are becoming increasingly attracted to targets in Canada, where fully 55% of the world’s leading public mining companies – involved in nearly 10,000 projects worldwide in 2010, around half of which were located outside Canada – are listed.

In particular, Chinese interest in Canada’s mining sector is founded mainly on gold, copper and iron ore, which had collectively accounted for 77% of Chinese mining acquisitions in the country since 2000 in the form of 55 mining deals.

Increased Chinese outbound investment to Canada was also greatly assisted by reforms implemented by China’s State Administration of Foreign Exchange, which in 2005 considerably eased restrictions on capital outflows. As a result, the value of Chinese outbound transactions began to increase significantly from 2006, making Canada a well-timed target when mining investment began to become more feasible in 2009.

Since 2009 we have already seen a number of large Chinese mining investments in Canada, and the coming few years will very likely see a substantial increase in such deals.

In July 2009, for example, the China Investment Corporation acquired a stake of 17.2% in Canada’s Teck Resources for USD$1.5 billion; in December 2009 CRCC-Tongguan Investment Co. Ltd. acquired Corriente Resources Inc. for USD$549 million; and in March 2010 China’s State Grid signed a USD$1 billion agreement with Quadra Mining.

So far in 2010 and 2011, moreover, we have seen a range of new deals, as large Chinese miners such as Baosteel (Noront Resources Ltd.), Jinchuan (Lundin Mining, Continental Minerals Corp. and Crowflight Minerals), and Shandong Gold Group (Kalahari Resources) made Canadian mining acquisitions.

As the latest focus area for Chinese mining investment, Chinese companies have come to regard investments in Canada as a safe investment with less associated risk. They perceive Canada as having a very stable political and economic environment with a more favourable tax regime than, for example, Australia.

Chinese investors are also attracted by the strong service sector of the Canadian mining industry, with specialisation in everything from exploration to development, construction and management.

Canadian law, moreover, is very favourable to resource activity, and the Investment Canada Act generally encourages foreign investment.

In addition, many Canadian resource companies are carrying relatively high debt loads, and are eager to sell non-core asset to reduce their debt.

For Chinese companies, the incentive to invest in Canada is obvious. Rapid development of its fixed assets has led China to become the world’s largest consumer of many minerals, and with modernisation and industrialisation, China has become the central focus of the global natural resources sector.

Canada now seems set to substantially benefit from this, and it seems to have everything in place to be the focus of a new wave of Chinese mining investment. Yet China will be seeking to leverage the favourable aspects of investing in Canada described above, and to avoid some of the complications it encountered in Australia and Africa.

In Australia, China was confronted with a fluctuating political relationship and national security concerns associated with some of its investments. In Africa, China has encountered some labour-related issues and accusations of imperialism from some quarters in the west.

Canada will no doubt present China with challenges of its own, yet more Chinese investment in Canada is inevitable. The focus for Canadian companies will be to seek a win-win configuration for the deals, and to figure out how best to leverage and exploit the China opportunity that has come knocking.

*Information for this article provided by Barry van Wyk, Senior Consultant, The Beijing Axis, a China-based international advisory firm operating in four areas Commodities, Capital, Procurement and Strategy.