From Cuban oil to Australian coal to Uzbek gas, hardly a week seems to go by without news of some sort of Chinese overseas resource deal being struck.
This being a new week, score keepers can add another deal to their list – South African gold.
On Monday, Gold One, an Australian gold miner whose main asset is in South Africa, announced that a consortium of Chinese investors – having already acquired a 17.7 per cent stake in the company in April – would become a majority shareholder of the business through the acquisition of a further 42-57 per cent stake.
The deal structure – which involves two share issues, a share tender and a convertible bond – is mind-numbingly complex. And the amount involved which, depending on the take-up rate on the share tender, would be between A$250m and A$350m ($370m, £228m), is small fry compared to the billion dollar deals that have been struck across the mining sector.
But for China watchers, the deal is noteworthy for a couple of reasons.
First, the players: make no mistake. While the consortium is made up of Baiyin (a mining and smelting group), the China-Africa Development Fund (CADF) and Long March Capital – the Chinese government, through its ownership of Baiyin and CADF, is the ultimate buyer. For a company like Gold One, the attractions of having the Chinese government on broad are obvious. As it said several times in the statement [emphasis ours]:
The Consortium shares Gold One’s vision and desire to grow through acquisition and anticipates that with a majority holding in Gold One, it will be able to provide access to low cost funding for such organic and acquisitive growth as required.
Gold One has already got one acquisition under its belt. It agreed last month to buy Rand Uranium, a South African uranium and gold company, for $250m. Backed by low cost financing from Beijing, other deals will probably not far off. Li Peixing, chairman of Baiyun seems to be suggesting this much when he said:
As part of our going global strategy, Baiyin has been seeking opportunities to invest in precious metal assets, in particular in Africa….The Consortium will commit substantial financial and technical support to assist Gold One to realise its strategy of expanding its African portfolio of assets and subsequently, international assets.
Then there’s the approach. Following the failed $18.5bn bid by CNOOC (the state owned Chinese oil company) for Unocal, the California-based oil company in 2005, China has taken a softly, softly approach to resource deals. Rather than acquiring companies outright, the country, through its sovereign wealth funds and state-owned companies, has opted instead for partial ownership.
The Gold One deal is another example of this modified approach, which is seen as more acceptable in countries such as the US, Canada and Australia, which have all tightened rules on foreign investments in raw material amid nationalist tinged concerns over energy and food security. Gold One said while the consortium’s initial 17.7 per cent stake purchase would be subject to approval from the Australian foreign investment board, it does not expect the deal to be blocked.
Lastly, the timing: although gold has come off its April peak, when it was trading at above $1,563 an ounce, to about $1,493, prices are still 38 per cent above what they were two years ago. As with other commodities, China is keen to lock down long-term supplies at a time when prices are high. It is helped by the strong renminbi, which has risen nearly 5 per cent against the dollar over the past 12 months.
And while much has been written about Chinese companies being willing to pay over the odds for foreign assets, the price for Gold One – which produced 66,445 ounces of gold last year and made A$19.3m in profit before tax – looks fair.
Under the terms of the deal:
- The consortium will inject A$150m into Gold One in exchange for 375m new shares issued by the company. This will be the equivalent of a 31 per cent stake, undiluted, and works out to about A$0.40 a share – a slight discount to Gold One’s closing share price of A$0.43 last Friday.
- Combining this with the 17.7 per cent stake it already owns gives it close to 49 per cent of the company. But since that is not enough to give it majority control, it will need to do a share tender. So separately, the consortium is offering A$0.55 a share to all Gold One shareholders who wish to sell. The tender offer price represents a 27.9 per cent premium to Thursday’s closing price.
- Depending on the take up rate, and the result of a forced redemption of a convertible bond, Gold One might have to do another share issue to ensure that the consortium hits its target of securing 60-75 per cent of the company.
- Should bondholders decide to convert the convertible bond that Gold One has in issue, this would dilute the consortium’s holding. Hence, Gold One said it would issue 188.7m new shares for the consortium at A$0.53 a share.
All this seems to be an awfully convoluted way to buy into a company. But when the acquirer is China and the target is a resource company, one would be naive to think it would be a simple transaction.
Related reading:
China lights a fire in global dealmaking, FT
China’s miners set to make tracks overseas, FT
China taps into Argentina’s oil prospects, FT
China’s oil majors come of age in M&A rush, FT
Wuhan enters scramble for Africa’s coal, FT
China-Africa file, beyondbrics
Tags: China-Africa, FDI, gold, M&A, mining
Posted in Asia, China | Permalink
