Despite slower expected economic growth in China, the rapidly developing nation is still hungry for commodities — from coal and iron ore to gold and just about everything else.
Chinese acquisitions of natural resource projects in Canada and around the world are on the rise and expected to continue growing.
But tapping into Chinese capital isn’t a cakewalk for Canadian mining and exploration companies.
Whereas a company in Canada might easily arrange a bought-deal financing through any number of investment banks, it’s not so easy or direct in China, says David McIntyre, a Toronto-based mining lawyer and partner at Gowlings.
“You sometimes don’t really know who your route would be to a deal, but it’s often not the traditional route,” he says. “With China, there’s more relationship and connections and trust building that has to go on, but the money is there. It's just a different process, it's more strategic.”
McIntyre joined Gowlings over two years ago to focus on Chinese clients interested in acquiring Canadian resource companies. Most of his clients are state-owned enterprises (SOEs) looking to secure supplies and diversify their sources of supply from the small number of major mining companies that sell to them.
As a former marketing executive with Vale (VALE-N) (before that he was general counsel for Inco), McIntyre used to visit the same clients as part of a mission to sell nickel, copper, cobalt, platinum group metals and other products the miner had to offer.
He’s part of a small contingent of Canadian professionals — lawyers, accountants, bankers and others — who spend much of their time in China, building and maintaining the network of connections that is so critical to accessing Chinese investors. For companies hoping to woo Chinese money, these professionals play a matchmaking role, lining up investment opportunities with investors.
The first step in that process for mining companies, says McIntyre, is to translate their investor materials into Chinese.
“It sounds so basic, but it’s a necessity,” he says. “Two years ago, nobody did that. (Now, mining companies) are well aware that a source of capital and a source of strategic partnership is based in China, and they almost all have a Chinese strategy.”
McIntyre most recently acted for Jilin Jien Nickel in its takeover of Goldbrook Ventures (GBK-V), its joint-venture partner at the Nunavik nickel project in Quebec. (The partners were also represented by Gowlings in their original takeover of Canadian Royalties, before McIntyre joined the firm.) He also represents China’s second-largest gold producer, Shandong Gold, which is reportedly pursuing gold producer Jaguar Mining (JAG-T).
While relationships are critical when dealing with Chinese SOEs, they take time to build. So Chinese SOEs are starting to test the waters with junior miners in particular through advance investors, McIntyre says. In this emerging trend, private investors take a small stake in companies (less than 10%) to make sure they’re on the up and up before an SOE gets involved.
“There’s a lot of suspicion from China about any international activity, so having an advance investor go in and have the relationship part started is now something that we’re seeing,” he explains.
“There’s an investor community that’s building up in mainland China and Hong Kong that is interested in junior mining investing,” McIntyre says. “There’s not necessarily any direct connection to the SOEs, but the SOEs will be interested in the fact that there’s been Chinese investment in a particular target before.”
That gives the SOEs “more of a friendly perspective on the investment, instead of just coming in cold.”
Aside from the need for commodities to feed China’s continued growth, acquisitions have also been on the rise because the Chinese are embracing a strategy of internationalizing their businesses and deploying their foreign currency reserves into non-cash uses, McIntyre explains.
Still, barriers to M&A remain, and a lot of deals don’t get concluded because of the differences in approach between China and the West, McIntyre says. That includes a bureaucratic approvals process for Chinese SOEs to navigate back home while trying to maintain the interest of a target overseas that may be able to attract rival bids.
“In China, for instance, they typically want to have a target locked up and then they’ll do due diligence for a period of time, finalize the deal, and then put it into a binding document. Whereas in Canada, when you’re in M&A, nobody will agree to sell at a price and then allow a long due-diligence period and then go to a binding document because they want to have a free auction for their assets.”
McIntyre adds: “That’s one of the challenges of doing transactions with Chinese clients, is that some are more prepared to enter the fray, so to speak, than others.”
As bottom-line-oriented companies, Chinese SOEs are more interested in advanced and producing projects than exploration, but China has become an option for junior miners as well as larger companies.
That early part of the pipeline is where Canada continues to have an advantage.
“As it is now, there’s very little interest in exploration internationally outside of Toronto and Australia,” McIntyre says. “We’ve got our niche in that we build the companies that eventually may be acquired.”
Canada could shore up its position with potential listings of Chinese mining companies, says McIntyre, who adds that there is interest from several Chinese companies with “fabulous” projects in China. At least one exploration bureau (exploration in China is done through separate state-owned bureaus) that has projects in Africa is also considering a listing.
“That would be a fabulous deal for profile for the TSX because it solidifies, if anything, the link the TSX has in the process,” McIntyre says.
The Sino-Forest (TRE-T) debacle has cast a pall on Chinese companies’ financial disclosure practices and business standards. But McIntyre points out that even Canada had the Bre-X Minerals scandal in the 1990s, and that it didn’t spell the end of the mining sector.
“That really did put a chill on the mining industry for awhile until they dealt with the core issues, and then it came roaring back,” he says.
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