September 02,2009

Chinese Steel Firms Taking Stakes in Small and Medium-Sized Australian Mines, and Eyeing More

By CSC staff, Shanghai

This year's iron ore price negotiations seem irrevocably broken, so Chinese iron and steel firms are rushing around to find small and medium-sized Australian miners for equity cooperation to enable them to avoid having much to do with the world's three monster iron ore providers.


Business data provider Dealogic says that Chinese companies' planned and completed investment this year in Australian mining firms has reached $9.7 billion, about triple that in 2008, and the pace is accelerating.


On September 1, Baotou Iron & Steel (Baogang) set up a joint venture company with the Australian iron ore exploration company Centrex Metals (CXM) on the Bungalow Magnetite project, aiming to establish a project with an annual output of three million tons of fine ores. The total investment is AU$3-4 billion and Baogang will invest AU$40 million, paid in three phases, and get 50% stake in the project after the investment.


Most small and medium-sized iron ore projects in Australia are open to foreign investment, and are now under increasing Chinese scrutiny. China's steel firms have technological advantages and attractive demand, but it is their solid finances that these mining companies find truly attractive.


On August 31, Australian miner Aquila Resources Ltd. announced it had signed a strategic cooperation agreement with China's largest steel group Baosteel to develop iron ore, coal and manganese projects. Baosteel will invest AU$285.6 million to obtain a 15% stake in Aquila through the placement 43.95 million shares at AU$6.50 per share, making Baosteel its second largest shareholder. The deal marks Baosteel first direct investment in an Australian mining company.

Wuhan Iron & Steel Group Corporation (WISCO) has also signed an agreement with CXM, to develop a South Australian iron ore project. CXM is providing a private offering of additional shares to WISCO, making the latter CXM's second largest shareholder, and WISCO is gaining a board seat. The two sides are also joining up to develop mines in south Australia's Eyre Peninsula. Total iron ore output is expected to reach two billion tons, with 30% tenor, and more than 65% fine ore.

Anshan Iron and Steel (Ansteel) has picked up 1.906588 billion shares of Gindalbie Metals, a 36.28% stake, at AU$162.06 million, and become its largest shareholder. In addition, Ansteel and Gindalbie Metals will invest AU$143.68 million in the Mt Karara iron ore project, with a total cost of AU$534 million.


China is following in the steps of Japan of three decades ago. Based on the data of Japan's resources deals in the 1970s and 1980s, Citi Investment Research estimates the net present value of Australia mining assets held by Japan is $20 billion. Australia's miners sell products worth $15 billion to Japan each year.


The current annual sales of mining products to China by Australia is about AU$22 billion. To reach a level proportionate with Japan's, China needs Australian mining assets worth AU$30 billion, more than three times what it owns at present.


Many of the good big mines are already in Japanese hands. The small and medium-sized mines Chinese firms are turning to show strong growth momentum and are happy to enter the Chinese market, thanks to the entrance of Chinese capital.

The China Iron & Steel Association is determined to unify the prices on the spot market with long agreement prices, which would be a substantial change in the 30-year-old iron ore benchmark pricing system. Many Australian mines are likely to pick up on this in exchange for guaranteed financing opportunities.


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