Workers of China Great Wall Drilling Corporation on a drilling platform in Kenya. Provided to China Daily

Chinese see advantages in buying listed companies that have mining assets in africa

China's search for mining resources in Africa is increasingly extending to companies listed on the London Stock Exchange, financial and legal advisers in London say.

Historically, Chinese companies have preferred to buy privately, but they are now learning the benefits of publicly traded targets, in particular the availability of reliable financial information.

Particularly with mining, London's distressed capital market is driving stock prices low despite strong fundamentals, making it more attractive to buy stocks rather than their underlying assets.

"So if you buy shares of a company you may get more assets per share - more ounces, or tonnes - than you would if you could buy the assets, because they're effectively trading at a discount to their asset value," says David Lewis, a partner at Clifford Chance, a law firm.

In the global mining market slowdown, China's push to secure resources has become more obvious. A recent PricewaterhouseCoopers report said that China accounted for 13 percent of all mining deals in the first six months of last year, up from 7 percent in the corresponding period of 2011.

The total value of all deals over the period was $25 billion (19.05 billion euros), excluding Glencore International Plc's $33 billion takeover bid for Xstrata Plc, which was announced last February but did not receive approval from EU regulators until November. The value of deals over the corresponding period in 2011 was $71 billion, the report said.

PwC also said it expected more mining transactions from Chinese bidders in the near future as the country invests in metals needed to feed its rapid infrastructure building.

"(China's) appetite for resources is expected to remain robust. That includes demand for key metals such as copper, used in manufacturing and construction, and the steel-making ingredients coal and iron ore."

In recent years a handful of Chinese bids for London-listed mining stocks have been successful, ranging from Xiamen Zijin Tongguan Investment Development Co Ltd buying Monterrico Metals plc in 2007 to China Guangdong Nuclear Power Holding Corp buying Kalahari Minerals plc early last year.

Monterrico, which owned several base metal projects in Peru, and Kalahari, which had a uranium mine in Namibia, are representative of most mining stocks in London, which have physical assets outside Britain.

They are drawn to the LSE because the concentration of mining analysts there can help to better explain their business models to investors, leading to improved financing terms.

This is particularly true for cash-hungry smaller mining companies, typically listed on the LSE's Alternative Investment Market. In October, 144 of its 1,102 stocks were in mining, the highest number of any single sector.

The other two exchanges with a high concentration of mining juniors are the Toronto Stock Exchange and the Australian Securities Exchange, where Chinese mining acquisitions have also taken place.

Last month the Chinese mining company Hanlong Group offered to buy the Australian-listed Sundance Resources Ltd, an acquisition that would put it in control of a major African iron ore mine. The acquisition should be completed in March, Hanlong says.

Obtaining a listing in an international financial center generally improves the exposure of an African mining company in the eyes of Chinese investors, Lewis says.

One example is African Barrick Gold, which has four producing mines in northwest Tanzania. It was de-merged from its Canadian-listed parent company Barrick Gold Corporation in 2010 to obtain a separate London listing, where investors' appetite for African resources is believed to be greater.

Although the spin-off was not explicitly intended to attract a takeover bid, its 500-page initial public offering prospectus put on the table much more information about the ABG entity than was available before the bid, and made ABG a bite-sized target for bids.

In August ABG attracted the interest of the Chinese miner China National Gold Group Corp, and analysts speculated that the Chinese company was carrying out due diligence on ABG. This week Barrick Gold Corp said it had ended talks with China National Gold on selling ABG.

Lewis says that even though public companies have a greater amount of financial information available, extensive due diligence is still desirable in most cases before making an offer.

"The bidder will want to do site visits to the projects, to look at the mine plans and any infrastructure requirements and whether they are practical - because there is no point having a mine without being able to get the product to market."

Such detailed information is generally not in the public domain for listed companies, and is typically provided by the target to the bidder with a view to obtain a better valuation.

Meanwhile, Chinese companies still have concerns when acquiring public targets compared with private ones, including financial and other information disclosures required by takeover rules, and the need to deal with the publicity of potentially failing in a bid, says Giles Distin, a partner at the law firm Squire Sanders.

"For takeovers of UK companies, the bidder is required by the UK Takeover Code to disclose financial and other information on itself and, sometimes, its owners, which some Chinese companies may not feel comfortable with if they've never had to disclose that sort of information before."

In comparison, North American bidders may feel more comfortable with such disclosures because they are often subject to more significant disclosure requirements in their home jurisdiction, Distin says.

Such comparison is supported by data from investment banking consultant Dealogic showing that in acquiring publicly traded companies, China ranked fourth between January and October, with a deal value of $52 billion, after the US ($243 billion), Japan ($94 billion), and Switzerland ($61 billion). With private deals, China ranked second, with a deal value of $98 billion, following the US ($356 billion).

Another concern of Chinese investors in trying to buy a public company is that the bid may fail, as often one bid attracts a higher counterbid from another investor.

One such case is the failure of Minmetals of China to buy Equinox Minerals last year, after attracting a counterbid from Barrick Gold of Canada of 7.2 billion Canadian dollars ($7.2 billion; 5.6 billion euros), 16 percent higher than Minmetals' bid.

Equinox, which owns assets in Zambia and Saudi Arabia, was listed in Australia and Canada.

"There is a risk that you will not win," Distin says. "You go out publicly with your offer, you've put your head above the parapet, and then you fail."

Majority shareholders' consent is usually much harder to obtain in public deals because of a more diversified share structure, he says.

"Acquirers may prefer to have a deal where you sign some legal documents with the key shareholders and then it's done. But a publicly traded company may have thousands of shareholders, and you can't go to all of them to secure consent prior to the offer."

Another challenge for Chinese bidders for London-listed targets is the need to first seek any necessary regulatory approvals from the Chinese government.

This additional step can put Chinese bidders at a disadvantage compared with rivals, who may be able to provide targets with better deal certainty from the outset, says Kathy Honeywood, a partner at Clifford Chance.

This challenge is particularly prominent when the Chinese bidder is a state-owned enterprise, as it cannot make a binding offer that is subject to Chinese regulatory approvals, under the UK Takeover Code, Honeywood says.

"When you make a binding offer, you are committed."

This means Chinese small and medium-sized enterprises need to structure their approach so they can obtain all necessary Chinese state approvals in advance.

Honeywood says another regulatory detail Chinese investors should be aware of from the outset is the need to have "certain funds" available before making a binding offer.

"That can come as a surprise to Chinese bidders, because they often assume the ability to obtain loans is sufficient, but it is not."

Despite the numerous challenges Chinese bidders still experience, they are increasingly aggressive in their pursuit of desirable assets, a banker at financial advisory firm Rothschild says.

"From an earlier model of partnering at the private project level, Chinese companies have become increasingly prepared now to take control of listed entities and develop their projects independently," says the banker, who did not want to be named.

Rothschild acted as financial adviser to the Australian-listed Extract Resources, which CGNPC bought last April, after CGNPC acquired Extract's largest shareholder, the London-listed Kalahari, in February.

The Rothschild banker recalled that the biggest challenge during CGNPC's bid for Kalahari was the unexpected Fukushima nuclear plant disaster, which reduced prices of nuclear assets globally.

Discussions of the CGNPC-Kalahari deal were halted for six months after the UK Takeover Panel rejected CGNPC's application for an offer price reduction from 290 pence a share to 270 pence, but CGNPC's perseverance in the deal led to success after the talks resumed.

More broadly, the Rothschild banker says Chinese companies are increasingly acknowledging the benefits in both profile and market experience gained by acquiring a public entity, or even the notion of retaining listed vehicles.

"Chinese companies know that by acquiring a public vehicle, this demonstrates an ability to close deals that is noticed by the wider market.

"Further, it is gradually being acknowledged that despite higher disclosure requirements, the retention of a listed public vehicle can allow a company to offer shares, raise funds and have a higher profile generally.

"It can also far more quickly demonstrate returns to shareholders through an increased share price, which is not so obvious if the company is private."

cecily.liu@chinadaily.com.cn

(China Daily 01/11/2013 page19)