China steps up global mining buys


By Phred Dvorak
The Wall Street Journal
Tuesday, July 20, 2010

In the global hunt for mining assets, China has emerged as the buyer to beat: Just a few years after suffering high-profile failures to close big acquisitions, Chinese buyers of all sizes are sealing more sophisticated deals at a higher rate of success.

Companies based in China or Hong Kong participated in $13 billion of outbound mining acquisitions and investments last year—100 times the level in 2005, according to data tracker Dealogic.

China-based companies are on a similar pace in 2010. Last week, Shandong Iron & Steel Group Co. announced a $1.5 billion investment into an African Minerals Ltd. iron-ore project in Sierra Leone, the latest of 76 outbound mining deals announced by China-based buyers so far this year, valued at $8.3 billion, according to Dealogic.

... Dispatch continues below ...


Sona Resources Expects Positive Cash Flow from Blackdome,
Plans Aggressive Exploration of Elizabeth Gold Property

On May 18, 2010, Sona Resources Corp. (TSXV: SYS, Frankfurt: QS7) announced the release of a preliminary economic assessment for gold production at its flagship Blackdome and Elizabeth properties in British Columbia.

Sona Executive Chairman Nick Ferris says: "We view this as a baseline scenario for gold production. The project is highly sensitive to the price of gold. A conservative valuation of gold at $1,093 per ounce would result in a pre-tax cash flow of $54 million. The assessment indicates that underground mining at the two sites would recover 183,600 ounces of gold and 62,500 ounces of silver. Permitting and infrastructure are already in place for processing ore at the Blackdome mill, with a 200-tonne per day throughput over an eight-year mine life. Our near-term goal is to continue aggressive exploration at Elizabeth and develop a million-plus-ounce gold resource, commencing production in 2013."

For complete information on Sona Resources Corp. please visit:

A Canadian gold opportunity ready for growth

China's hunger for metals and minerals will be a principal driver in boosting its overall outbound investment to more than $100 billion in 2014, predicts Derek Scissors, a Heritage Foundation researcher who has built a database to track those deals.

China's success in snapping up makers of iron ore, nickel, molybdenum and other minerals has come as much of the world smarted from the global financial crisis. In 2009, China accounted for one-third of the value of all crossborder mining mergers and acquisitions, up from 7.4% in 2007 and less than 1% in 2004, Dealogic found.

In Australia, historically a major destination for Chinese mining investments, Chinese acquirers accounted for nearly 40% of all inbound mining deals last year, according to PricewaterhouseCoopers annual review of mining M&A. In Canada, a newer market for Chinese buyers, the number was around one-quarter.

The latest deals introduce a new class of suitors.

In years past, Chinese buyers of overseas oil and ore assets tended to be big, state-owned enterprises that favored outright takeovers and got reputations for ham-handed deal making—suffering a series of public rejections, such as China Minmetals Corp.'s failed attempt to buy Canadian miner Noranda Inc. in 2005.

These days, potential investors range from private manufacturers to Hong Kong investors to China's sovereign-wealth fund, China Investment Corp. China deal trackers say those investors are savvier and more flexible than they were a few years ago, experimenting with joint ventures and minority stakes.

Just a year ago, Hong Kong-based CST Mining Group Ltd. was China Sci-Tech Holdings Ltd., a 15-person Hong Kong public company investing principally in real estate. Earlier this year, it bought two copper miners for $380 million—one Canadian, one Australian—hired a bunch of Western mining veterans to run them, raised $600 million through a private share placement and changed its name to CST Mining Group Ltd.

Chinese investors are finding "more and more kinds of ways to get business from the world,'' says Amy Cheng, CST's banker and the mining-team leader for BOC International, the investment banking arm of state-owned Bank of China Ltd.

Ms. Cheng estimates Chinese mining investors were successful last year at closing around three-quarters of the deals they attempted; a few years ago, she says, they were rebuffed nearly all of the time. The financial crisis provided an opening.

"Every project [that wants money] looks at Chinese companies," she said.

The Chinese government hasn't made a public push for these acquisitions, but the explosion of deals in recent years, many by state-owned companies, suggests they are a priority.

China already consumes one-third of the world's copper and 40% of its base metals, and produces half of the world's steel. Though demand for commodities has eased a bit as the pace of China's growth has slowed this year, it is expected to stay strong in the long term.

China has complained that foreign companies have charged too much for iron ore and other commodities, a concern that became acute in 2007 when the world's No. 1 miner, BHP Billiton Ltd., attempted to buy Rio Tinto in a deal that promised to create a united minerals supplier with enormous pricing power.

The bid failed, but shortly afterward China made what remains its biggest overseas acquisition in minerals, Chinalco's $14 billion purchase of 9% of Rio Tinto. Buoyed by that investment, Hong Kong and Chinese firms conducted a record $17.5 billion in outbound mining M&A in 2008, according to Dealogic.

China's buying binge could eventually increase the global supply of many minerals and ores, says Tim Goldsmith, the Australia-based global mining leader for PricewaterhouseCoopers, who says his job now requires him to spend a week every month in China. If China's demand stays strong, and other economies like India's grow rapidly as well, the added supply could help to temper commodity-prices rises, he says.

Weaker global demand could lead to a drop in prices, a scenario Mr. Goldsmith calls less likely. Big global miners should make out well either way, he says, since their mines tend to be more profitable, with higher expected returns, than those many Chinese firms are investing in.

Some Chinese investors are buying companies with mines that are at earlier stages of development or exploration, a riskier but potentially more profitable proposition.

"There was a time when they wouldn't invest in anything that wasn't producing already,'' says Howard Balloch, a former Canadian ambassador to China who founded a Beijing-based investment-banking boutique, the Balloch Group, in 2001. Now, "the Chinese are willing to be more creative in their investments and willing to move a little up the ladder to higher levels of risk."

That is bringing more would-be Chinese deal makers to Toronto and Vancouver, where much of the world's capital-raising for mining exploration takes place.

"On the Chinese side, it's almost like someone flipped a switch a few years ago and interest went from zero to significant investment in Canadian firms," says David Redford, a Vancouver-based lawyer in the mining practice of Goodmans LLC.

The interest is reciprocal: Mr. Redford estimates some 80% of his current mining clients are looking for investment from Chinese sources. Three years ago, he says, one-third or fewer were.

The Canadian copper miner purchased by CST, Toronto-based Chariot Resources Ltd., found itself looking eastward for investment after its long-time lenders pulled the plug on future financing at the end of 2008, amid the financial crisis. The company had just finished a feasibility study on its copper assets in Peru and needed several hundred million dollars to build a mine. But Western bankers weren't willing to lend to a company with no revenue or operations, says Ulli Rath, the CEO at the time.

In October 2009, Chariot's board decided to put the company up for sale.

The firm hired RBC Capital Markets, the investment banking arm of Royal Bank of Canada, to look for suitors. On the side, one of Chariot's directors also phoned some contacts in China: BOC International's Ms. Cheng, and a private adviser named Ken Wang, a Chinese geologist who had worked for years in Canada. Mr. Wang had helped broker three other deals between North American miners and Chinese investors in the past two years.

Ms. Cheng had started BOC International's mining group in Hong Kong in 2005; she knew all the big Chinese investors as well as the state-owned mining firms. Within a month, Ms. Cheng and Mr. Wang had arranged meetings between five potential investors and Chariot directors in Hong Kong.

The most aggressive suitor was CST, which was just starting to transform itself into a mining operator. Last year, the company had bought a gold mine in Indonesia from struggling Australian miner Oz Minerals Ltd., and hired former Rio Tinto executive Owen Hegarty to run it.

CST directors wanted to jump into copper mining as well, and saw Chariot as a good entry, says Mr. Hegarty, who's now vice chairman of the company. In February, CST proffered an all-cash bid of around C$245 million—67 Canadian cents per share. That's double what Chariot had been trading at a few months before on the Toronto Stock Exchange, and a better deal than other offers collected by RBC Capital Markets, says Mr. Rath, who stepped down in June when the deal closed.

RBC Capital Markets declined comment.

In March, CST announced the purchase of the Australian copper miner; by the end of June it had raised $600 million through private placements to fund its purchases as well as mine development.

Ms. Cheng hired Mr. Wang in late June to work full-time with her on resource deals.

* * *

Join GATA here:

New Orleans Investment Conference
Wednesday-Saturday, October 27-30, 2010
Hilton New Orleans Riverside Hotel

* * *

Support GATA by purchasing a colorful GATA T-shirt:

Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:

Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:

* * *

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

To contribute to GATA, please visit:


Prophecy to Become Coal Producer This Year
with 1.5 Billion Tonnes of Resource

Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen.

For Prophecy's complete press release about its production plans, please visit: