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China Targets Metals Market With Equinox Bid

By Western standards, Minmetals Resources Ltd.'s $6.5 billion all-cash offer for Equinox Minerals Ltd. merits a short footnote in the history of corporate mergers and acquisitions. While transactions like this are above average in dollar amount, they aren't big enough to effect structural market changes and are usually quickly forgotten after a short while.

For Minmetals, though, the Equinox deal represents another piece in a gigantic puzzle China — yes, China, the country, and not its local businesses — is meticulously assembling as part of a broader plan to ensure its economy can maintain its strong growth rate and keep rivals at bay. While China may be concerned about its economy overheating, hence recent decisions to jack up borrowing rates, it still needs to keep workers busy and continue to improve its competitive position. To attain this goal, China needs raw materials, especially metals; and what China wants, it is increasingly able to afford today.

For the rest of the globe, though, China's voracious appetite for natural minerals is sparking a bidding war for control of precious global resources, including oil reserves and many of the metals used in the production of high-tech products. It may also result in other governments and national regulators keeping a closer watch on, and perhaps refusing to approve, transactions they believe could tilt the odds even more heavily in China's favor.

Minmetals' unsolicited bid for Equinox will no doubt attract interest from Australian regulators. The Chinese company made its offer contingent on Equinox dropping its own bid for copper miner Lundin Mining Corp. Equinox has said it is reviewing the Minmetals offer.

Australia has previously blocked mining transactions negotiated by other Chinese companies, and the Minmetals-Equinox deal could suffer the same fate if the parties fail to agree to regulatory conditions. Although Equinox is considered an Australian company, Minmetals is actually interested in the company because of its large copper holdings in Zambia and Saudi Arabia. With copper prices soaring, China needs to expand its interest in the market to guarantee supply for its growing manufacturing industries, including the high-tech sector, one of the major users of copper.

In case you are wondering, Minmetals is not just another Chinese mining company. The Hong Kong-traded company is part of a group of businesses focused on the production of metals such as aluminum, copper, gold, lead, silver, zinc, and other precious metals — businesses that are directly controlled by the Chinese government. Its parent company, China Minmetals Corp., is a multibillion-dollar enterprise founded in 1950 and “classified among the 39 key enterprises under the direct supervision of the Central government,” according to a statement on Minmetals' Website.

In an investor presentation, Minmetals said its offer for Equinox would be financed through “a combination of existing cash reserves, long-term credit facilities from Chinese banks, and equity, including financial investments in Minmetals by Chinese institutions. The proposed offer is supported by MMR's ultimate controlling shareholder, China Minmetals Corp.”

In other words, it helps to have a really rich parent.

12 comments on “China Targets Metals Market With Equinox Bid

  1. DataCrunch
    April 5, 2011

    This seems like a smart deal and one that will most likely NOT get blocked by Australia’s Foreign Investment Review Board (which has been known to block these kind of deals), due to the fact that most of Equinox’s assets are outside Australia, mostly in Zambia and Saudi Arabia.  Because of this fact, it does not pose a threat to Australia’s national interests and should get approved.  If the deal does get hung up or blocked, it would raise some eyebrows as to why.

  2. Barbara Jorgensen
    April 6, 2011

    I think this has huge implications beyond the regulatory issues. The government of China being the “owner” of this operation; the control the country would have on the production; the overall strategy of China shoring up its raw materials supply. It does seem like a no-brainer for Australia, but I'm wondering if other interests–such as the US–should be paying close attention to this deal

  3. Ms. Daisy
    April 6, 2011

    Dave;

    I beg to differ on the impact of this sale on Australia if it goes through. The fact that the government of China is owner of this company means that the control of the operations and  production of Equinox will be transfered to Minmetal. This definitely takes away any involvement or control by the Australian government once the bid goes through. There will be limits on what the regulations can control. More importantly, Australia will only become a conduit for the raw materials supply.

    There is a slow but definite monopoly being built by the Chinese government for High tech raw materials. Australia's Foreign Investment Review Board should in my opinion deny this merger and other countries need to pay attention to China's long term strategy regarding raw materials or we will all be left as 100% consumers of China's products.

     

     

  4. DataCrunch
    April 6, 2011

    Hi Ms. Daisy, I am not say that there won’t be an impact, but what I am saying is that the Australian government may not be able to block this particular deal as it has other deals.  Because of the fact that the majority of Equinox’s mining assets are outside Australia.   And if they decide to change their laws based on this deal, it may cause some diplomatic issues.  We’ll see how this plays out and see if the deal get rejected or approved.

  5. stochastic excursion
    April 6, 2011

    In principle as long as we are on friendly terms with China there's no reason why they shouldn't be able to corner the market on a few commodities.  The balance of trade would still have to be maintained.  As many of the consumers for electronics raw materials are in China itself, overcharging for the materials wouldn't make sense.  Since there is currently a tariff-free playing field, companies outside of China don't seem to be in very great danger of being squeezed out.

  6. Anand
    April 7, 2011

    Dave,

     I agree with you that Australian government may not be able to block this particular deal because most of the mines are situated outside Australia. But am just wondering what would be the reaction of US to this deal ?  Will it be interested to place its own bid on equnix ?

  7. DataCrunch
    April 7, 2011

    Hi anandvy, I believe the buyout figures were purposely generous for Equinox, as to avoid a competitive bid process, so I don’t see   other buyers at this point.

  8. Ashu001
    April 7, 2011

    Bolaji,

    Its a well known fact that the reason Copper(alongwith all Commodities) are rising today is because of a Falling US Dollar[If you compare Copper prices in terms of Gold (Sound/real money)prices have actually fallen over the last year or so].

    The reason that the US dollar is declining is because of lack of support from Big Players(like China,Japan) and the QE policy by the US Federal Reserve.

    So all the Chinese have to do (to bring down Copper prices),is turn around and buy more and more US Dollars and US Treasuries.And Voila!!

    The US dollar strengthens causing speculative interests to run away from the Commodity Complex and back into the US Dollar(following the Big money)…As a result the entire Commodity complex drops like a stone!!!

    And China can buy all the Commodities they want at much lower prices (in US Dollar terms)….

    Now thats Food for Thought!!!

    Regards

    Ashish.

  9. Ashu001
    April 7, 2011

    After all,It isn't like China is about to run out Copper anytime soon..

    Farmers and various other small-time speculators all across China  have stock piled Tons and Tons of copper in the expectation that they will get much higher prices three-six months from now.

    Its sure as hell going to be fun watching how things work out when prices start sliding as QE2 comes to a halt in May.

    The Panic could well turn into a runaway dumping of thousands of Tons of Copper on the market,turning China into a ….Wait for it…..

    Copper Exporter!!!

    Fun times for sure.

    Ashish.

  10. stochastic excursion
    April 11, 2011

    Or they could just stamp it into yuan pieces.  Now that's hard currency.

  11. Ashu001
    April 11, 2011

    Stochastic,

    There is a very nice saying-Never underestimate the Stupidity of Politicians.

    If they do see that demand for Copper has fallen off a cliff(and if the Chinese State is the largest holder of Copper),then what you say can very well come to fruition.

    Would it be the best use of Copper? I am not so sure….

    Regards

    Ashish.

  12. stochastic excursion
    April 11, 2011

    It's hard to be smart, even for the best of us, to be sure.  Yes if there is a shortfall in copper it would be *too* liquid for currency.

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