Resource Buying Binge Hits Speed Bump 中国海外资源收购面临减速
A plan by aluminum giant Chalco (HKEx: 2600; Shanghai: 601600) to buy a Mongolian-focused mining company is reportedly on the verge of collapse due to politics, a development that could have big implications for China’s recent buying spree for global resource assets. For anyone who hasn’t been paying close attention, Chinese energy and resource firms, from oil and coal giants to gold and iron ore miners, have embarked on a multibillion-dollar spending spree over the last few years to feed the country’s growing economy. The buying binge has gained momentum in the last year, as cash-rich Chinese companies, with strong support from Beijing, have purchased assets from cash-challenged international owners still struggling as a result of the global economic downturn. Now, at least one country that has become a favorite destination for Chinese buying, Mongolia, appears to finally be saying “no”.
Foreign media are reporting that a previously announced deal that would have seen Chalco purchase SouthGobi Resources (HKEx: 1878; Toronto: SGQ) for nearly $1 billion is on the verge of collapse due to opposition from the Mongolian government. (English article) Chalco had said earlier this month that it would extend the deadline for the purchase for a second time as it sought to win approval for the deal from the Mongolian government, which was becoming uneasy with a growing number of its natural resources being purchased for development by Chinese companies.
In one of the latest such deals, China’s top coal producer Shenhua (HKEx: 1088; Shanghai: 601088) last year announced a major plan to develop coal resources in a project called Tavan Tolgoi as part of a larger consortium that also included companies from the US and Russia. (previous post) With this latest development, it’s becoming clear that Mongolia wants to take a sharply slow the exploitation of its rich natural resources by companies from its much larger southern neighbor, and I suspect we may not see any major new China-Mongolia resource tie-ups for at least the next year or 2.
On a broader basis, the kind of discomfort Mongolia is feeling may soon appear in other parts of the world as other governments grow increasingly uneasy with China’s resource buying. Chinese firms have made a number of major purchases worth more than $1 billion each over the last year, with oil major CNOOC (HKEx: 883; NYSE: CEO) unveiling a major deal last month to buy Canadian oil producer Nexen (Toronto: NXY) for a hefty $15 billion. (previous post)
Canada has become a favorite M&A destination for Chinese resource firms, and I previously predicted the Nexen deal has a high chance of failure due to potential resistance not only from the Canadian government but also from Washington, which must approve the deal because Nexen has major US-based assets.
In a way, this inevitable new wave of resistance to Chinese resource M&A may actually be a good thing for Chinese firms, many of which are paying a big premium for assets that could quickly tumble in value if global commodity prices fall. But at the end of the day, Chinese firms, whether they like it or not, could soon find their global purchasing power severely limited due to political sensitivities, sending a chill through the global resource M&A market.
Bottom line: Mongolia’s rejection of a resource buying deal by Chalco could mark the beginning of larger global resistance to similar purchases due to political sensitivities.
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