China adds to resources muscle in Australia
Increased investment in nation's mines reflects Japanese-style strategy in bid to ensure supplies, writes Lachlan Colquhoun
Not content with simply purchasing commodities from Australia, China and its corporates are becoming involved as never before in the Australian mining sector as investors as well as customers.
The two countries have never been closer and at the heart of the relationship is China's hunger for commodities to fuel its growth and development.
For Australia, the China-driven commodities boom is not only shoring up economic growth and driving up profits at corporates such as Rio Tinto and BHP Billiton but it is responsible for micro-economic impacts such as a property boom in the western city of Perth and a chronic national shortage of mining engineers.
For Chinese miners, Australia is a new frontier and many have followed the closer diplomatic ties - as evidenced by ongoing discussions on a free-trade agreement - with strategic investments in iron ore, aluminium, gas and approaches in the uranium sector.
'The Chinese are largely emulating the Japanese strategy in the 1980s which was to invest in the nation which contains the commodities they need the most,' says a Perth-based mining industry veteran.
'If you look at iron ore, prices went up more than 70 per cent last year and have just gone up 19 per cent again, so it makes complete sense for the Chinese to not only be customers but also have some ownership of these resources as well.'
It is a strategy the Chinese have been pursuing energetically ever since 2003 when offshore oil giant CNOOC paid A$543 million (HK$3.24 billion) for 5.3 per cent of the North West Shelf oil and gas project off the West Australian coast.
With this deal, part of a A$25 billion supply agreement to supply Guangdong with liquefied natural gas, CNOOC became the first foreign company allowed to own a stake in Australia's gas reserves.
More recently it has been the iron ore sector that has been the focus as a slew of recent deals and near deals shows.
In July, Hong Kong-listed Citic Pacific paid US$290 million for the mining rights to one billion tonnes of ore in Western Australia, the largest Chinese investment in Australia's iron ore industry.
The investment, which will be followed by another US$200 million commitment in 2008, is vital to kick off what could be a A$7 billion iron ore project at Cape Preston being developed by Perth-based company Mineralogy.
Alongside the Citic deal, however, have been some failures in China's attempts to get a slice of Australian iron ore. Hong Kong's Noble Group offered US$270 million in July for 10 per cent of another West Australian iron ore miner, Fortescue Metals, which is developing a A$2.5 billion project in the state's Pilbara region.
Despite the fact that the bulk of the project's output is committed to Chinese buyers, talks between Noble and Fortescue broke down in July and would appear to have stalled. Fortescue has reportedly been talking to Citic, among others.
The mainland's third-largest steelmaker, the Shougang Group, agreed to pay A$52 million for a 73 per cent stake in a subsidiary of iron ore miner Mount Gibson Iron, only to be squeezed out by a minority shareholder who decided it wanted to buy it.
The lower end of the market has seen some action, such as the A$30 million deal for Hunan Nonferrous Metals to take a 10 per cent stake in Compass Resources while an investment from the Jin Chuan Group was largely behind the successful float of junior South Australian miner Redstone Resources in August.
The other big development has been in aluminium, where the Aluminum Corp of China (Chalco) has proposed a A$3 billion investment in bauxite leases and a refinery on the Cape York Peninsula in Queensland in the far northeast of the continent, seeing off Russian giant Rusal.
More deals could follow in the coal sector where Yanzhou Coal Mining - China's second-largest listed coal miner - already has one Australian asset, the Austar mine and is seeking a second.
'We'll first look at Australia where we have a platform,' the company's chief financial officer Wu Yuxiang said in April. 'We're in talks now and if they go smoothly we could finalise a deal this year.'
The next major push, however, could be in uranium - a resource where Australia has 40 per cent of the world's known deposits.
Australia and China signed a deal in April to begin exports from 2010 and already Chinese companies are making contact with Australian uranium miners and explorers.
Few even in Australia have heard of a company called Toro Energy but it holds one of 128 uranium exploration licences in South Australia, home to two of Australia's three uranium mines.
Toro director Greg Hall recently confirmed that 'there's been a lot of interest shown to our company' from China, while an executive from another junior explorer, Southern Gold, also said he had received approaches from China.
'I believe there's been a general instruction from higher-ups in the Chinese government to shore up the supply of resources they need,' said Stephen Biggins of Southern Gold.