Since the Chinalco-Rio Tinto scandal, relations between Chinese and Australian mining companies have been… shall we say… bipolar?
Rio Tinto (RTP:NYSE) backed out of a $19+ billion deal in order to enter into a massive joint venture with former rival BHP Billiton (BHP:NYSE). Since then, four Rio Tinto employees based in China have been arrested under suspicion of stealing state secrets.
It’s nasty and unresolved, and the consequences are now reverberating through other potential Chinese-Australian mining deals.
For example, last spring, China’s state-owned metals group, Minmetals, was barred from acquiring OZ Minerals’ assets because one particular project fell within a sensitive geographic area close to Australia’s weapons testing site.
The deal eventually went through, but without the sensitive project.
And now, with the Rio Tinto situation unresolved, Australia has blocked two more mining deals.
First, China’s Wugang Australia Resources and Australia’s Western Plains Resources had agreed to a $39 million mining investment that would further Western Plains’ Hawks Nest Project. But this project is within a weapons-testing range in South Australia.
Forbes reports, “Australia’s military once again flexed its muscles to Chinese investors and said that the Hawks Nest Project signed between China’s Wugang Australia Resources and Australia’s Western Plains Resources, would ‘not be compatible with defense’s activities at the Woomera Prohibited Area on safety, operational and national security grounds.’”
Both companies are appealing the ruling.
The second deal blocked by Australia was a majority stake purchase of rare-earth producer Lynas Corp. by China Non-Ferrous Metal Mining (Group) Co.
“Australia’s Foreign Investment Review Board ordered China Non-Ferrous to limit its stake in Lynas to less than 50 percent, the Sydney-based company said today in a statement,” reports Jason Scott for Bloomberg.
More than 90% of the world’s rare earths production comes from China. These are metals that are used in batteries and other technologies for things like iPod music players, liquid crystal displays, hybrid cars and wind turbines.
These moves by Australia certainly signal the wary relationship between the two countries, but Australia just might be doing Chinese companies a favor.
Right now, China’s domestic steel industry has an overcapacity of 100 million tons, according to the International Herald Tribune. The industry is expected to see investment dwindle over the next year and more.
China’s oldest and biggest construction company, Metallurgical Corp. of China, just IPO’d in Shanghai and Hong Kong, generating a modest (by Chinese IPO standards) $5.12 billion from the offering.
The new Hong Kong listing took a beating today, though.
“Shares of construction and engineering company Metallurgical Corp. of China were down 12% in their Hong Kong debut in mid-session trading Thursday, reflecting investors’ cooling appetite for new listings,” reports MarketWatch.
After soaring 28% on Monday, the Shanghai listing has since slipped, and is now trading at about 10% above its offer price.
Last week, I talked about Australia in Taipan Insider. Specifically, I was talking about the natural gas deals between the Gorgon Project stakeholders (Chevron, Exxon, Shell) and Asian countries (Japan, South Korea, China).
I argued that the investment play should not be the companies involved, but rather, the source of the deals – the natural gas. It’s the same concept here… The play isn’t the Chinese companies buying stakes in Australian companies. It’s not even the specific Australian companies, though sometimes these junior players can offer aggressive investors outstanding potential.
The play just might be Australia itself, meaning a basket of companies across a number of industries. That puts the iShares MSCI Australia Index ETF (EWA:NYSE) center stage.
I’ve recommended this ETF to Taipan Insiders already, but the move higher is just beginning.
Other Articles Related To This Topic:
