China picks resources minnows

China picks resources minnows

Published: February 5 2008 00:57 | Last updated: February 5 2008 00:57

Aluminium Corporation of China executives are becoming increasingly familiar with the lobbying of politicians in Australia. The group’s senior management was in Sydney on Monday to talk about its audacious purchase of 9 per cent of Rio Tinto, but company executives have also spent much of the past year negotiating a $2.4bn project to develop a bauxite mine in northern Queensland.

Chinalco, as the group is known, is one of a new breed of Chinese state-owned companies that suddenly have power and cash, but little overseas experience.

While the Rio Tinto investment has dominated headlines, the Queensland project is evidence of another important but less well-publicised trend – the string of smaller deals that Chinese companies have undertaken to gain access to mineral deposits around the world.

In the past few months, Chinese companies have signed agreements to develop copper in Afghanistan and Peru, and nickel in Burma.

“It has been going on for a few years, but these investments have really accelerated over the last year and there are likely to be many more,” says Geoffrey Cheng at Daiwa Institute of Research.

“The companies are looking to boost their profits through overseas investments and the government is encouraging them.”

The deals reflect a coincidence of both government and corporate goals. Planners in Beijing have long been focused on the need to secure overseas resources. Yet as China’s industrialisation has accelerated in the past few years, the country has had to import large amounts of commodities that it is rich in, such as coal.

As a result, state financial institutions are often willing to support overseas investments in upstream mining assets – even if Chinese companies are not always directly involved.

On Monday China Development Bank, which helped finance the purchase of Chinalco’s stake in Rio Tinto, signed an agreement with Anglo American to back mining investments in China and Africa.

Economic growth, coupled with a booming stock market, has also left many of the state-owned companies that dominate the domestic mining and metals industry with a lot of cash and newly confident managements.

Chinese companies have tended to go to the resource-rich countries where they feel most welcome – which has seen Australia become one of its preferred markets.

President Hu Jintao spent nearly a whole week in Australia last year to help build acceptance for more Chinese investment. During that visit, Anshan Iron and Steel signed a A$1.8bn ($1.6bn) iron ore joint venture in western Australia with Gindalbie Metals.

Graeme Rowley, executive director of operations at Fortescue Metals Group, which on Monday admitted it had held discussions with potential Chinese investors, says that Australia is attractive to companies from China because of geography and the business climate.

“Australia represents a very proximal market and that has to be of value,” he says. “There aren’t many historical barriers to business with China.”

Chinalco’s investment in Rio Tinto follows the Australian path, but in other respects it is very different from the more low-key deals Chinese mining companies have undertaken.

Most of the investments have involved new mining projects, which the Chinese can control from the start, or companies with exploratory rights to a new project. Purchasing individual mines is less politically controversial and is also a chance to learn about operating overseas.

“The Chinese realise that if they stick to smaller projects and put in a lot of the investment themselves, they will be much more welcome than if they make splashy acquisitions,” says an investment banker.

Additional reporting by Peter Smith in Sydney