China Failed Mining Deals Top $45 Billion on Hanlong BungleBloomberg News
Sichuan Hanlong Group’s botched $1.2 billion bid for Australia’s Sundance Resources Ltd. brings the value of China’s recent failed mining deals to $45 billion, a record that’s prompted stricter Chinese scrutiny of acquisitions.
Chinese companies attempted $107 billion worth of mining takeovers over the past five years, with about $45 billion, or 42 percent by value, of deals ending in failure. Of $562 billion of deals proposed globally in the same period, $180 billion, or 32 percent, didn’t proceed, according to data compiled by Bloomberg.
The collapse yesterday of the bid for Sundance, seeking to develop a $4.7 billion iron ore project in Africa, comes after a string of failed investments by Chinese companies, including the demise of a $19.5 billion investment in Rio Tinto Group in 2009. Regulators under China’s new leadership team of Xi Jinping and Li Keqiang have told state-owned companies that overseas takeovers will face a more stringent approval process.
“Chinese regulators are probably going to allow fewer deals to go through as they become more discerning,” Jonathan Li, a corporate partner at Clayton Utz, said in a phone interview from Melbourne. “The market will come to expect that when a deal involving a Chinese acquirer is announced, all the internal Chinese approvals will already have been obtained.”
The termination of Hanlong’s bid for Sundance is China’s biggest overseas acquisition failure since April 2011 when Minmetals Resources Ltd., the Hong Kong unit of China’s biggest metals trader, abandoned its C$6.04 billion ($5.9 billion) offer for Equinox Minerals Ltd.
China’s largest failed deal was the $19.5 billion proposed investment in Rio, the world’s second-biggest mining company, by Aluminum Corp. of China that would have given Chinalco, as the state-controlled company is known, stakes in assets including iron ore mines in Australia.
Sundance shares fell a record 48 percent to 11 Australian cents at the close of trade in Sydney.
Closely held Hanlong, whose billionaire chairman Liu Han is reportedly in police custody in China after being detained last month, didn’t meet a second funding deadline last month for the deal, prompting further talks that failed. It had been told by Chinese government agencies to study partnerships with state-owned enterprises to get financing for its proposal to buy the shares in Sundance that it didn’t already own.
Sundance ended the accord because the funding condition wasn’t met and after being told by the Chinese company that it was unlikely to meet other required conditions, the Perth-based company said yesterday in a statement. It’s in talks with other Chinese and non-Chinese groups on the Mbalam-Nabeba iron ore project, Sundance said, without naming them.
China’s top planning bodies including the National Development and Reform Commission in a January statement told key industries to increase their risk prevention analysis and controls when studying overseas acquisitions. State-owned Chinese companies will be under stricter controls on the scale and direction of investments in 2013, the Assets Supervision and Administration Commission (SASAC) said last month, according to the official Xinhua News Agency, citing the China Daily.
“It would be great news to cool down the mania for rushing for overseas deals,” said Xu Zhongbo, chief executive officer of Beijing Metal Consulting Ltd., who has worked in the steel and mining industry for more than three decades. “We don’t have the ability yet to create a globally powerful mining company.”
Sinosteel Corp.’s acquisition of Australia’s Midwest Corp. for A$1.4 billion ($1.5 billion) in 2008 was an example of a poor investment, Xu said. Sinosteel President Huang Tianwen was removed from his post by SASAC in 2011. He also cited Citic Pacific Ltd.’s $8 billion Sino Iron project in Australia, which has had a more than four-fold budget blowout.
The pressure on China to acquire foreign supplies of metals and minerals is being driven by economic growth that’s forecast to continue to outstrip the developed world. China will expand 8.1 percent this year and 8 percent in 2014 after the weakest annual growth in 13 years in 2012, according to the median estimate of analysts compiled by Bloomberg.
Xi, who was named general secretary of China’s Communist Party in November and president last month, has stepped up a crackdown on corruption, which together with efforts to weaken the clout of some state-owned enterprises, are likely to run up against well-entrenched interests. These include the so-called princelings, the offspring of senior leaders.
“At one time the princelings would have had a much bigger latitude to do what they wanted to without question,” Vic Edwards, visiting fellow at the University of New South Wales’ Australian School of Business, said in a phone interview. “The central government has a much better understanding of what is happening” with approvals for overseas deals, he said.
Other unsuccessful deals include a bid by Chinese billionaire Yu Yong’s Cathay Fortune Corp. for Australia’s Discovery Metals Ltd., which collapsed last month, and Zijin Mining Group Co.’s bid for Indophil Resources NL in 2010.
China National Gold Group Corp. and Barrick Gold Corp., the world’s biggest producer, ended talks in January over the sale of the Toronto-based company’s 1.44 billion-pound ($2.2 billion) African unit without reaching an agreement. The deal would have been the largest gold-company takeover involving a Chinese company, according to data compiled by Bloomberg.
China, which faces obstacles in foreign transactions including cultural gaps and environmental barriers, has “attached greater importance to the possible risks that lie in overseas deals,” Sun Zhaoxue, president of China National Gold, said last month at the National People’s Congress in Beijing.
The government was asking for risk-assessment reports for overseas projects, Sun said. SASAC which hadn’t previously studied those reports, is now asking to review them, he said.
Slower growth in China and lower commodity prices may drive stricter guidelines for deals to ensure economic returns, according to Jason Teh, who helps manage about $4 billion at Investors Mutual Ltd. The benchmark LMEX index of the six main metals on the London Metal Exchange has fallen 28 percent in the past two years.
“The fact is the commodity market has slowed,” Teh said from Sydney. “You’d want to have stricter guidelines.”
Chinese companies continue to make and seek acquisitions under the new regulatory regime as the government doesn’t want to stop foreign takeovers rather it wants to reduce the failure rate. Citic Group Corp., China’s largest state-owned investment company and parent of Citic Pacific, in February agreed to pay about A$452 million for a 13 percent stake in Australia’s Alumina Ltd., partner in the world’s biggest alumina business.
China Minmetals Corp. and Aluminum Corp. of China are possible robust overseas buyers, according to Deloitte & Touche LLP. Zhaojin Mining Industry Co., China’s fourth-biggest gold producer, is studying takeovers in South America and other regions, while Chinalco Mining Corporation International said in January it may seek assets in South America, Africa and Asia.
“No doubt there has been a learning curve, if you look at the series of transactions and the assets they’ve acquired,” said Clayton Utz’s Li, who added that Chinese regulators had conducted a review last year of investments in Australia. “In recent years, the investments have become less speculative.”
— With assistance by Helen Yuan, and Elisabeth Behrmann