SHENZHEN, China (ResourceInvestor.com) -- Late last month China Minmetals [600058.SS] and Canada's Noranda [NRD] provisionally agreed to merge in a $5.5 billion deal. If successful, it would be the largest foreign buyout by a Chinese company.
Minmetals wants Noranda's copper, nickel, zinc and aluminum assets to provide a reliable supply of metals to a voracious Chinese economy that continues to grow rapidly despite official efforts to slow the pace recently.
Minmetals has some way to go before it is in the league of competitors such as CVRD [RIO], Anglo American [AAUK], Xstrata [XTA.L], BHP Billiton [BUP], Phelps Dodge [PD]. The intent is clear though. Minmetals wants to be a world player.
Minmetals is the flagship of China's mining industry. It is controlled by SASAC, the state controlled Assets Supervision and Administration Commission of the State Council. Notably it has relied on Citibank to smooth its entry to Canada.
For 2003, Minmetals's revenues topped $11 billion with "business income" of $4.7 billion. Of that, copper comprised 43%, nickel 28%, aluminum 15%, and zinc 9%.
Last year China consumed vast quantities of raw materials and threats to supply are a real concern given that such a high percentage of global output is now earmarked for the country.
This is one of the reasons why Minmetals appears willing to pay an apparently expensive price - the strategic imperatives, especially for a state owned company, are clear. We can expect far more of this "walk-out-and-bring-back" approach as China supplements underdeveloped or low volume local resources. Noranda is one slice of a much bigger cake being eyed by China.
A long process
The world has only recently become so aware of Chinese demand. The current corporate trends can actually be traced back to 1992 when Shougang Group, a leading iron and steel conglomerate headquarterd in Beijing, established Shougang-Hierro in Peru. That was one of the biggest foreign forays by a Chinese company.
Similarly, Baosteel Group, another leading iron and steel conglomerate located in Shanghai, contracted with CVRD to explore the Gerais iron ore mine in Brazil in 2001 and with Australia's Hamersley to explore Eastern Ranges mine in Australia in 2002. That produced a joint venture that is responsible for one quarter of all Chinese iron ore imports. It is one template, but we can probably expect more outright acquisitions and mergers than joint ventures as Chinese companies grow their capital bases.
China still has a long way to go although there is $480 billion of foreign exchange reserves to support state-owned corporations eyeing the international market.
Non-economic obstructions, especially the human rights record, become the issue.
Recently accusations against the Minmetals-Noranda transaction become one of the hot topics in Canada. Some critics consider Minmetals an abusive employer and are suspicious of its ties to the state.
While the debate about Minmetals and China's human rights record is ferocious in Canada's media, Chinese reporters have been rather sanguine. There is certainly lots of coverage of the buyout, but no meaningful discussion of the social issues.
This is not surprising since human rights is a touchy subject and the Propaganda Department of the Chinese Communist Party censors most of the influential media.
On October 11, Chinese Foreign Minister Li Zhaoxing heckled an Associated Press journalist in Beijing for his question to visiting UN Secretary-General Kofi Annan about China's human rights record.
One day later, Yangquan Daily, a local newspaper of the Yangquan municipal organs, published some news about the local labor insurance department of Minmetals, which may make the Noranda acquisition critics even more uneasy.
The company divided the families of 89 employees who died on the job into castes, paying different compensation depending on their status. A handful of "Revolutionary Martyr" families got a 10,360 Yuan subsidy, 23 "penniless families" got a 40,000 Yuan loan as the tuition fee for their children, 9 "poverty families" got 21,000 Yuan for educational relief according to Yangquan Daily.
Yangquan city, located in east central Shanxi province, has estimated coal reserves of 871 billion tons. It is a growing industrial city and a center of important coal-producing area. Iron is also mined nearby.