China aims for mining's big league with Equinox bid
ANDY HOFFMAN
RTGAM






VANCOUVER - In the global mining sector, this is China Inc.'s coming out party.

With an unprecedented plan for a $6.3-billion hostile bid for Toronto's Equinox Minerals Ltd. , China Minmetals Corp. subsidiary Minmetals Resources Ltd. (MMR) has established a blueprint aimed at creating the country's first global mining giant.

China's roaring economy and insatiable appetite for resources has driven the decade-long global commodity boom. However, China's much vaunted "going out" strategy - a goal of owning more of the world's mines beyond its borders - has been largely unsuccessful.

Despite their deep pockets, Chinese companies controlled just 1 per cent of mining production outside of China at the start of 2011, according to Stockholm research firm Raw Materials Group. Faced with political opposition and a general wariness of Chinese state-backed investment on Western soil, Chinese companies have had to settle for buying costly development projects or taking minority positions in major production assets.

Hong Kong-based MMR wants to change that and its proposed bid for Equinox, if successful, may prove the formula that finally vaults Chinese mining firms into the big leagues.

"We haven't seen a global heavyweight coming out of China yet in the mining sector to rival the likes of Xstrata, BHP or Vale. This could well be getting them on the road to achieving that status," said John Nyholt, head of PriceWaterhouseCoopers' (PWC) Canadian transaction services.

MMR was created as a vehicle for Beijing parent Minmetals' overseas ambitions. It is 75-per-cent controlled by the state-owned company and the remaining 25 per cent of MMR's shares trade on the Hong Kong Stock Exchange.

The company has installed a westerner, Andrew Michelmore, as its chief executive officer and public face. A Rhodes scholar and former world champion rower, the Australian is a veteran mining deal maker.

In 2008, as the head of Zinifex, Mr. Michelmore oversaw a merger with rival Australian zinc miner Oxiana that created OZ Minerals, one of the world's largest producers of the metal used to galvanize steel.

Mr. Michelmore was tapped to head OZ just as the global financial crisis torpedoed metals prices and sapped demand. OZ's weighty debt load forced it to put itself up for sale and it dealt the bulk of its assets to Minmetals for $1.7-billion (Australian) in 2009.

Enticed by Minmetals' financial clout and aggressive expansion strategy, Mr. Michelmore elected to join MMR as CEO. In January, he hinted that MMR, with a market capitalization of about $19.5-billion Hong Kong dollars ($2.5-billion), was preparing to launch a transformative transaction.

Parent Minmetals has "given us a remit to go out and grow this business in the international market. We would be looking to spend at least the equivalent of the market valuation of Minmetals Resources … It's got to be significant; it's got to make a difference," Mr. Michelmore said.

With its unexpected hostile bid for Equinox, MMR has demonstrated a sophisticated and nimble acquisition ability. Mr. Michelmore had been eyeing the Canadian company for more than a year, but waited until Equinox made itself vulnerable by launching an unsolicited bid of its own with a pricey and controversial offer for Vancouver's Lundin Mining.

The move is deal making 101 in the West, but represents a relatively unique level of M&A savvy for a Chinese mining firm. Despite its position as the world's largest commodity consumer, China's role in global mining mergers and acquisitions has been minuscule.

In 2010, Chinese buyers accounted for just 6 per cent of all mining takeovers, according to PWC, while North American companies were responsible for almost 52 per cent of mining transactions and Australian miners did 18 per cent of the deals.

To date, China's largest mining investment was China Aluminum Corp.'s $14-billion (U.S.) purchase of a 9-per-cent stake in London-based Rio Tinto in 2008. Until MMR's proposed $6.3-billion (Canadian) all-cash bid for Equinox, no other Chinese overseas mining deal has been larger than $3-billion.

MMR may have to increase its plan to offer $7 per share for Equinox, as the TSX-listed company's stock surged past the bid price Monday. However, because Equinox's major assets are a copper mine in Zambia and a base-metal project in Saudi Arabia, as well as the fact that its top executives are based in Australia, the unsolicited Chinese bid is not expected to generate significant political opposition.

"As there are no major Canadian or Australian assets involved, I do not think there will be any major opposition from either country. China also has expertise dealing with African and Middle-Eastern governments" said CNC Asset Management Ltd. founder Na Liu.

"It is a good model for China Inc. to follow."