Why did Barrick jump in, and Minmetals jump out?Published by MAC on 2011-05-02
Source: Business Spectator, Nostromo
London Calling ponders recent Western moves on Africa
A week ago, the world's biggest gold producer bid more than C$7 billion for Zambian copper miner, Equinox. The takeover is likely to proceed without hitch now that Barrick's only major competitor, China's Minmetals, has withdrawn from the race. (More below).
The market hasn't been that impressed by Barrick's move and doubts were expressed as to whether it's particularly prudent for a company that's so far only dabbled in the red metal .
Nonetheless, the current gold bull isn't going to bellow forever. Investors are already shying away from pouring even more cash into gold-only companies. For the time being at least, copper (but not forgetting silver) is the boom metal. In any case, gold is geologically associated with copper in porphyry deposits, like butter is to bread, and are often mined together.
Barrick's purchase of the most promising new global copper producers thus makes some sense.
Where there's a Will there's a Way
Just before the Barrick-Equinox tie-up was announced, Rio Tinto successfully gained control of Riversdale Mining and its coking coal leases in Mozambique - potentially the most important assets of their kind, certainly in Africa.
The Big Brit has also successfully bounced back in Guinea, by regaining control of the southern part of the Simandou iron ore deposit, under taxation terms which are highly favourable to the UK company.
Some years back, Rio Tinto judged this to be one of (if not the) biggest unexploited iron ore deposits left on earth.
Rio rarely gets such matters wrong.
So, while the bunting was being strung out for Barrick in Canada, perhaps we should have paid more attention to an equally significant wedding between global capital and African resources.
And a right royal, peculiarly British, affair it's shaping up to be.
A new Chinese perspective on Africa's mineral wealth?
Just why did China's huge Minmetals conglomerate withdraw its takeover bid for Equinox so swiftly, once Barrick made its own move on the company?
Certainly this wasn't the first time a Chinese company has pulled out of such negotiations. According to US "think tank" The Heritage Foundation, between 2006 and 2010 some US$37 billion of the roughly US$100 billion earmarked by Chinese mineral companies for foreign direct investment, never hit its mark. See: Chinese Overseas Investments, 2006-2010
However, Minmetals didn't appear to think twice before bowing out in the face of Barrick's bid - and that's certainly unusual.
Stephen Bartholomeusz of Australia's Business Spectator reckons that Minmetals is trying to reframe itself as a "Western type" company; thus countering widespread perceptions (especially in Africa and Zambia in particular) that Chinese companies are simply out to grab what they can at almost any price.
If this is true, and Minmetal's lead is followed by other big Chinese extractive enterprises, it would mark something of a turn-around.
While Western outfits, such as African Barrick, will inevitably continue wreaking damage on a significant number of African communities, their Shanghai- and Hong Kong-listed counterparts could claim to be the truly "responsible" partners in the continent's economic development.
Of course that's highly speculative. It may simply be that - realising the present copper boom won't last forever - Minmetals judged making a higher bid for Equinox not worth the effort.
[London Calling is written by Nostromo Research. Views expressed in this column do not necessarily represent those of any other party. Reproduction, with acknowledgment of sources, is welcome].
Deciphering Minmetals' message
By Stephen Bartholomeusz
27 April 2011
The sheer alacrity with which Minmetals Resources abandoned its short-lived $6.3 billion bid for Equinox Minerals after Canada's Barrick Gold intervened was presumably designed to make a statement. But what is the message MMR or China is trying to send to the markets?
Were MMR a conventional Western company with conventional Western shareholders the abrupt end to the bid might not have provoked much discussion. Barrick has, of course, raised the bidding by about $800 million and added a $250 million break fee to the price of a rival's success.
By any measure, despite the appeal of copper in what appears to be a copper-short world, Barrick is offering a very, very big price for Equinox and its copper projects in Zambia and Saudi Arabia.
MMR, however, isn't a conventional Western company. It is 75 per cent owned by China Minmetals, a Chinese state-owned enterprise designated by China as a "key enterprise", which means its operations and strategies are influenced by national strategic and economic priorities.
If Equinox and the big copper deposits it controls were considered vital to China's national interest there is little doubt that MMR could have attracted funding for a higher offer from China's state-owned banks and institutions.
While MMR may not be a conventional Western company, however, neither is it a conventional Chinese SOE. In many respects it is an experiment in progress, a beachhead for a different style of expansion in the resources sector.
MMR was created by the backing in of MMG, itself created with the purchase of most of Oz Minerals' assets during the worst of the financial crisis, into a Hong Kong-listed vehicle last year. With those assets China Minmetals also acquired a largely-Australian management team, led by former Oz Minerals (and WMC Resources) chief executive, Andrew Michelmore.
China Minmetals wants to leverage the experience of that team, and their credibility in the resources sector, to build a major presence in the base metals sector. The bid for Equinox fitted that ambition.
Michelmore has, however, made it clear that he and his team have been given significant independence and have been encouraged to run MMR as they would any Western company.
The Chinese appear to regard MMR as vehicle for gaining a better understanding of how to use their financial resources more efficiently, as well defusing some of the cynicism about their offshore activities and the economic nationalism they have tended to provoke.
If Michelmore and his team can establish that MMR operates just like any other resources company, with the same levels of transparency and discipline, there will be less anxiety about its motivations and less concern about its acquisitions.
That need to demonstrate discipline may have been one of the factors in MMR's near-instant withdrawal from the bidding. Michelmore said the Barrick bid was above MMR's "most optimistic" assessment of Equinox's value.
Michelmore has also made no secret of his desire to attract more non-Chinese capital to MMR, which would also add to its credibility and its equity funding base. Paying over the odds for Equinox would have damaged that ambition and the longer term prospects of the group realising its goal of becoming a significant global player in base metals.
In that sense, the speed with which MMR departed the bidding for Equinox could be seen as a significant statement of independence and intent by MMR.
Whether or not it might also demonstrate a determination by China Inc not to jeopardise MMR's potential and/or not to be as profligate with its capital as it might have been in some past SOE acquisitions in the resources sector is a question that may now be better answered by monitoring the activities of SOE-controlled vehicles other than MMR.