September 25,2009

Security, Monopoly Concerns Stymie China's Acquisition of Australian Miners

By CSC staff, Shanghai

The Australian subsidiary of Wuhan Iron and Steel has announced its intention to acquire 50% stakes of Western Plains Corporation's Hawks Nest project. The project is located in

Australia's Woomera restricted military zone, and the Australian Defense Department's opposition to the acquisition on the basis of security is regarded as "over-reaction" by Western Plains.


In another case, analysts believe Australian regulatory authorities delayed the acquisition of a 51.66% stake in Lynas Corp by China Nonferrous Metals Mining Group (CNMMG) over worries that China would monopolize the global rare earth production. CNMMG finally gave up the deal.


Lynas announced on September 24 that Australia's Foreign Investment Review Board (FIRB) required CNMMG to reduce its desired stake to below 50% and the number of its members on Lynas' board to less than half. CNMMG refused to accept these conditions and terminated the transaction. CNMMG had previously pledged to FIRB that the board's independent control of rare earth sales would be retained.

On May 1, it was announced that CNMMG would buy 700 million newly issued Lynas shares at AU$ 0.36 per share, to gain a 51.66% stakes with a total investment of about AU$252 million, and that CNMMG would provide a guaranteed loan of $104 million to Lynas from Chinese banks to complete the financing for the first phase of the rare earth project.


The approval process, however, did not go smoothly. On July 8, Lynas said FIRB required CNMMG to withdraw its previous application and submit a new one. Early in September, Lynas announced that the transaction had not been approved by the expiration of the review, and that the approval period was automatically extended to early October.


95% of the world's rare earth supply comes from China. China has reduced rare earth export quotas for three consecutive years and will suspend the issuance of new rare-earth mining operation licenses by next June. Chinese officials say terbium and dysprosium are in short supply in the domestic market, triggering concerns from foreign countries about China's increasing efforts to curb the export of rare earth.

It is reported that China Investment Corporation (CIC) is working with the state-owned Baotou Steel Group to establish a new firm, with registered capital of several billions of yuan, specializing in rare earth mining, purchasing and storage, to integrate rare earth resources in the Inner Mongolia Autonomous Region. CIC will hold over 80% of the new company and operate the project through China Jianyin Investment. Rare earth is the most important strategic resource in Inner Mongolia, and the reserve in Baotou accounts for 87% of the country's and 40% of the world's.


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