Cash-rich China on buying spree

ANDY HOFFMAN

From Friday's Globe and Mail

February 19, 2009 at 9:09 PM EST

Call it the “China Solution.”

For cash-strapped resources companies battered by collapsing commodity prices, China is fast becoming the financier of choice.

Flush with cash at a time when most countries and corporations are struggling to gain access capital, the Asian economic superpower has spent nearly $60-billion (U.S.) in less than a week in a series of deals that will secure a long-term supply of iron ore, copper, zinc and oil.

“Cash is king and China has lots of it,” said Egizio Bianchini, global head of metals and mining at BMO Nesbitt Burns, which in the past, has represented state-owned Chinese firms in several mining deals.

Lundin Mining

Rio Tinto

“China is looking and saying ‘We don't have a lot of competition here and we have ready cash.' [For almost everyone else] there is no public debt market and no public equity market,” he said.

Desperate for financing amid stalled capital markets and investor abandonment of the sector, resource producers are turning to China for a commodity it has in spades: ready money.

Yesterday, Brazil signed a deal to supply China with 100,000 to 160,000 barrels of oil a day in exchange for billions of dollars of investment. Under the agreement signed in Brasilia, state-owned China Development Bank will provide financing to Brazil's state-run energy company Petrobras to develop its massive oil reserves.

“It could reach $10-billion,” Petrobras CEO Jose Sergio Gabrielli told reporters.

The Brazil deal follows China's agreement to lend $25-billion to Russian oil producer OAO Rosneft and pipeline operator OAO Transfnet. In exchange for the financing, Russia will provide China with an additional 300,000 barrels a day over 20 years through a dedicated pipeline. China Development Bank is also lending the money to the Russian oil companies.

The Russian deal followed a $1.7-billion bid Monday for Australia's OZ Minerals Ltd. by state-owned China Minmetals Corp. The Australia-based zinc producer's shares have been halted since November as it tried to sort out its financial woes.

Last week, Aluminum Corp. of China (Chinalco) unveiled plans to invest $19.5-billion in debt-laden Rio Tinto PLC [RTP-N]. As part of the deal, Chinalco will pay Rio $12.5-billion for direct stakes in iron ore, aluminum and copper mines.

“China is on a shopping spree for global resources,” Canaccord Adams analyst Michael Deng wrote in a recent report to clients.

China is the world's largest consumer of commodities. While the country's economy has slowed due to the global economic downturn, its gross domestic product is still expected to increase by about 6 per cent this year compared with 9 per cent in 2008 and 13 per cent in 2007. A $586-billion (U.S.) stimulus package will spur infrastructure spending, which is expected to underpin commodities demand.

New loans by Chinese banks jumped by 1.62 trillion yuan or about $237-billion (U.S.) last month, an increase of more than 21 per cent from the month before. China's stock market has bucked the global downturn as the Shanghai composite index has gained 22 per cent this year. And unlike many U.S. and European financial institutions crippled by toxic debt linked to bad mortgages, China's banks have largely escaped the contagion.

The country's voracious need for metals helped push prices for iron ore, coal and copper to record highs last year. The global financial crisis has now cut prices for most metals in half; China is throwing its cash around to secure a cheap supply.

China's ascent to the ranks of top resource sector deal maker is sure to be a hot topic of discussion at BMO's metals and mining conference in Florida next week. About 100 of the world's top mining firms will be presenting to investors at the annual conference, including Teck Cominco and Lundin Mining [LUN-T], both grappling with distressed balance sheets. “Chinese mining companies are viewing the current metals glut as an opportunity to establish a foothold … there is no shortage of Canadian mining companies that are in the same distressed situation as Rio Tinto and OZ Minerals,” TD Newcrest analyst Greg Barnes wrote in a report.