SA Mines and Energy Journal : June 2009
JUNE/JULY 2009 SA MINES & ENERGY JOURNAL 13 FEATURE It started as a trickle four or so years ago, rose sharply during the global economic boom and, now that the world economy is on its knees, has turned into a flood. Chinese interest in investing in Australian resource stocks has never been higher. And Australian resource companies, with the world recession ensuring their share price valuations and traditional sources of funding have evaporated, have rarely been more receptive. It seems like a match made in heaven. The Chinese, backed by a government directive to go forth and secure resources supplies, are seizing the opportunity to secure much-needed raw materials and investing in resources around the world, often at bargain-basement prices. Chinese investors are also very astute and see this as a time of opportunity. And Australians are more than willing to entertain Chinese interest in whatever form it takes -- direct equity in a company, direct equity in specific projects, and takeover or joint ventures. But Chinese investment in Australian resources has not been without its detractors. Concern over growing Chinese investment reached fever pitch earlier this year when the state- owned Aluminium Corp of China, or Chinalco, proposed a $26.59 billion investment in Rio Tinto -- an 18 per cent stake in the global miner. China is seeking Australia's approval for the deal, which has prompted a national television advertising blitz. South Australian Independent Senator Nick Xenophon, high-profile Nationals senator Barnaby Joyce and Federal Opposition Leader Malcolm Turnbull are among those to voice concern over the deal. "You sell the milk, not the cow, and we should be selling the minerals, not the mine, " Mr Xenophon said. At the time of writing, the deal was starting to look shaky as values had returned to the mining sector and disquiet was growing among the population at large. The proposed Rio deal was followed by a proposed $438 million Chinese investment in iron ore miner Fortescue Metals Group and a binding heads-of- agreement with Centrex Metals which saw the iron ore miner sell a 60 per cent interest in two SA iron ore deposits to Wuhan Iron and Steel, China's third-biggest steelmaker, for $180 million. Chinese investment again made the headlines earlier this year when federal Treasurer Wayne Swan announced the bid by Chinese company Minmetals, for the copper and zinc miner OZ Minerals, would be blocked, based on national security interests (it lies within the Woomera Prohibited area, a weapons testing range in the state's central north). Minmetals subsequently revised it's bid and agreed to excise SA's Prominent Hill from the deal. The recently announced $45 million Heads of Agreement between Wuhan Iron and Steel Group (Wuhan) and iron ore hopeful Western Plains Resources will further test the Government's position on Chinese investment in sensitive military areas. Wuhan plans to take a 50 per cent interest in the miner's Hawks Nest project in SA, which is in the Woomera Prohibited Area. The deal was also awaiting Foreign Investment Review Board (FIRB) approval as this journal was going to print. Detractors have focused on the potential control over pricing of raw materials by the Chinese. However, Centre for Independent Studies economist Dr Stephen Kirchner is among those to dismiss these worries. "The real interest of China is in promoting an increase in the global supply, rather than trying to corner the market, " he said. "As we know from long historical experience, attempts to corner commodity markets rarely end in success. " Dr Kirchner is joined by John Dawkins, the federal treasurer during the Keating government and trade minister in the Hawke government, who now advises to firms in Australia and China doing business through his company, Government Relations Australia. "China has decided when they are sourcing their raw materials, particularly from the mining sector, they want a third to come from mines in which they have an equity interest, a third which would come from long-term contracts and a third essentially from the spot market, " Mr Dawkins said. "This would give them a balance of both price and security. " This policy meant that on the spot market, they would sometimes be confronted by lower prices than the long-term average and sometimes by higher prices. "The whole idea is to even out the prices they are paying but at the same time ensure that they have long-term security of supply. Both things are important to them, " Mr Dawkins said. Growing disquiet about Chinese investment in Australia has also prompted statements from our politicians. "This is no time for a retreat to protectionism or xenophobia, " Federal Minister for Resources and Energy Martin Ferguson told the Melbourne Mining Club recently. It was important to look beyond the short term to ensure Australia's resource sector was prepared for an economic recovery and has indicated he wants Australia to be the world's biggest uranium exporter. Assistant Treasurer Chris Bowen has moved to assure Australians that most foreign investment from China is in our national interest. "As a country rich in resources, we need some foreign investment to develop those resources, " he said. "Most foreign investment, including that from China, is in our national interest, especially at a time like this. It creates jobs. " You sell the milk, not the cow, and we should be selling the minerals, not the mine. SA Senator Nick Xenophon.
April May 2009