Cloudy Prospects for Investing Down Under

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A general manager at Australian iron ore miner Aquila Resources told a news agency October 8 that the Canberra government would require leading Chinese steelmaker Baosteel to resubmit a proposal for investing in his company.

The bad news announced by Aquila's Russell Tippe followed earlier announcements that China's Wuhan Iron and Steel Group (Wugang) and China Nonferrous Metal Mining Co. had dropped plans to invest in Australia, citing government obstacles.

Australian miner Western Plains Resources Ltd. (WPG) said September 23 it had been notified that the Australian Department of Defence disagreed with its plan to partner with Wugang for exploring the Hawks Nest mining area. Defense officials blamed security and national interests.

And just a day before, rare minerals miner Lynas Corp. announced that the Australian Foreign Investment Review Board (FIRB) was requiring that its Chinese partner China Nonferrous Metal Mining Co. reduce its investment in the company. China Nonferrous eventually dropped the Lynas deal.

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Guo Feili, an analyst at Iron Ore Research Pty Ltd., told Caijing that without support from Chinese steel companies and banks, many major Australian mining projects would have trouble raising enough capital.

"Everyone has realized the importance of China for Australia's mining industry and economy," Guo said. "Most industry insiders clearly understand that there is no problem with Chinese capital."

Meanwhile, Australia's third-largest iron ore producer, Fortescue Metals Group (FMG), is eagerly awaiting Chinese investment. On August 17, FMG signed an agreement with the China Iron and Steel Association to sell 20 million tons of ore to Chinese mills at relatively lower prices within the year. In return, FMG will get up to US$ 6 billion in financing from China.

To date, the financing agreement has not been settled. But in a letter to Caijing, FMG said the company's financing plan has not changed. A source close to the situation said China Investment Corp. and the China Export and Import Bank have been talking with FMG about financing.

Meanwhile, Guo has suggested a commercial solution to the issue of investment barriers. "I believe that a special resources fund, which is a platform to assist Chinese investment in Australia's mining assets, will be an efficient way to conduct investments in both economic and political aspects," he said.

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Chinese Capital

The breakdown for a China Nonferrous investment forced Lynas to seek alternative financing. But it wasn't hard. After just one week, the company announced it had raised US$ 165 million through a share placement.

"As the economy gets better, investors are active," Wang said. "And without investment from Chinese state firms, a share placement needs no government approval."

Yet Wang insisted resource-rich Australia is in urgent need of overseas investment. "If you can persuade the Australians that you will not control their resources, they will welcome you," the Lynas executive said.

The improved global economy has reduced pressure for many mining companies in Australia, while making it easier for them to seek financing through capital markets.

"Economic conditions in Australia have been stronger than expected and measures of confidence have recovered," the Reserve Bank of Australia said in a recent report. "Overall, growth through 2010 looks likely to be close to trend."

However, many mining industry insiders think Australia's mining sector still needs Chinese investment. "A better market condition doesn't mean that they don't need Chinese capital anymore," said an Australian official in charge of foreign investment. "The better conditions were actually generated by China. There is demand from China and they have a market.

Australian companies "will need China more in the future," he said

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Caps on Investment

On the day the Lynas deal collapsed, FIRB official Patrick Colmer told Chinese investors at a forum that foreign investment in Australia should target companies listed on the domestic stock market. He said FIRB had received 90 investment applications from China over the previous 18 months, involving investments worth a total US$ 34 billion.

To avoid legal troubles, Colmer suggested foreign investors consult FIRB about investment requirements before going too far. Stake purchases in mining projects already in operation should not exceed 15 percent, he said, while investments in new projects should not exceed 49 percent.

Colmer's statement was seen as an official notice of investment caps for Chinese investors. Wang said the industry earlier understood that investment stakes in Australia should not exceed 15 percent, but the FIRB official's comments apparently were the first, clear statement from the government.

Guo said FIRB may enforce these requirements on a case-by-case basis, and according to bilateral relations between Australia and China. "There is also a communication mechanism at the state level," he said. "Let's see the outcome after that."

Among Australians, opinions vary. Clive Palmer, a domestic mining tycoon, criticized Colmer's statement as reflecting a government attitude toward Chinese investment that he described as "racism."

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China Nonferrous expected to pay AU$ 0.36 per share, or AU$ 252 million, for a 51.66 percent stake in Lynas, the Australian firm announced May 1. The Chinese partner also offered to guarantee US$ 104 million in Chinese bank loans for Lynas.

FIRB's objection to the Lynas deal stemmed from Australian government worries that the Chinese company would secure control of rare minerals.

Guo Ran, investment director for China Nonferrous, told Caijing that "FIRB's concern is unnecessary, as Lynas' rare earth resources will be developed and processed overseas without transporting to China."

Lynas' Wang said products from the new venture would mainly be sold to buyers in the United States and Japan, while a small portion would be sold in Australia. The company has contracts with buyers in North America, Europe and Japan.

In hopes of settling FIRB concerns, the two companies also agreed to establish an independent sales team. However, after FIRB hesitated and proposed even stricter requirements, China Nonferrous dropped out.

"We have made many compromises," Guo said. "Our rights would not match obligations, so we have to drop the deal."

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Wugang's early May proposal called for a 50-50 joint venture with WPG to develop Hawks Nest in central Australia, with the Chinese company contributing AU$ 45 million. It also wanted to buy a 15 percent stake in WPG for AU$ 3 million.

A Wugang executive in charge of overseas investment told Caijing that WPG obtained all legal documents for developing the Hawks Nest site, so he was disappointed by the government's decision.

"We can't understand why the Department of Defence rejected Wugang's partnership with WPG," the executive said, adding that Wugang is continuing talks with defense officials about the proposal.

WPG said September 23 the defense agency had "overreacted," and that it would continue to seek a partnership with Wugang.

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Facing Hurdles

Wugang and China Nonferrous proposed their Down Under investments in May. They had reason for optimism.

At the time, an ambitious proposal by China Aluminum Corp. (Chinalco) to invest US$ 19.2 billion in Australian mining giant Rio Tinto was awaiting what could have been a thumbs-up decision by the Canberra government. And other major deals proposed by three Chinese companies -- Hunan Valin, China Minmetals, and Anshan Iron and Steel Group – had won FIRB approvals after several, difficult rounds of debate.

But when the government rejected the Chinalco deal, it appeared Chinese investment prospects in Australia had turned a corner.

The latest plans to fall off the negotiating table were worth much less monetarily than the Chinalco proposal. But they would have allowed Chinese companies to acquire larger stakes in the targeted Australian companies.

Baosteel offered AU$ 290 million in August to buy 15 percent of Aquila, which would have made it the miner's second-largest shareholder

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These back-to-back challenges confronting Chinese company investments triggered concern that the Australian government may be tightening control of investment capital from China. These fears have surfaced despite consensus among industry insiders in both countries that the Australian mining sector needs Chinese investors.

"Most large-scale resource companies have been recovering" in Australia since the 2008 global financial meltdown, said Wang Ou, chief adviser for Lynas. "But some smaller mining companies are still suffering difficulties."

Philip Kirchlechner, an analyst at Australian Iron Ore Research Pty Ltd., told Caijing that "Chinese investment benefits Australia," although at the moment "the investments are little sensitive due to political reasons.

"Therefore," Kirchlechner added, "Chinese companies should be more prudent."