Latin American riches lure mainland miners

Oil and gas, especially in offshore Brazil, the biggest draw for Chinese firms in Central and South America, says investment specialist

PUBLISHED : Monday, 01 October, 2012, 12:00am
UPDATED : Monday, 01 October, 2012, 4:20am


Mainland energy and resource firms are eyeing opportunities to acquire more assets in Latin America, a new frontier for China's outbound investment, according to a Latin American partner of global law firm Baker & McKenzie.

Roberto Martins, the Sao Paulo, Brazil-based head of energy, chemicals, mining and infrastructure at Baker & McKenzie, said oil and gas, especially in offshore Brazil, were the biggest draw for mainland firms in Central and South America.

Iron ore and non-ferrous metals such as copper, of which China is a big importer, could also see some deals if sellers were willing to lower prices amid weaker demand.

Mainland investment in the energy and resources sector in Latin America rocketed from US$105 million in 2008 and US$362 million in 2009, to US$18.41 billion in 2010, according to Dealogic data. The 2010 figure included US$6.6 billion spent by offshore oil and gas major CNOOC in an oil and gas firm in Argentina.

Last year, deals valued at US$4.8 billion were completed, compared with just US$940 million so far this year, according to Dealogic.

Martins said the Brazilian government was finalising the regulatory framework for auctioning a batch of licences for exploration of offshore oil and gas. Previously, projects were auctioned one by one.

"Some laws still need to be approved by Congress," Martins said. "My own expectation is that some projects will be awarded next year … this is just the beginning … oil and gas promises to be a very hot spot."

He expects more opportunities will arise for Chinese firms to buy into South American energy assets, as highly indebted southern European nations might sell more assets to meet budget deficit targets.

China Petrochemical, the nation's second-largest oil and gas producer and the most aggressive state-owned buyer of overseas assets in the industry, agreed in November last year to pay US$4.8 billion for 40 per cent of the Brazilian unit of Portugal's largest energy firm, Galp Energia.

The deal gave China Petrochemical a slice of the vast offshore oil and gas potential in Brazil.

The country is poised to become one of the world's top holders of oil reserves in the next few years, thanks to major discoveries in deep-water regions.

China Three Gorges, the developer of the world's largest hydropower project, won an auction in December to buy 21 per cent of Energias de Portugal (EDP) - a major European electricity firm - for €2.69 billion (HK$26.82 billion). EDP also has electricity businesses in Brazil, Africa and the United States.

Victor Gu, a Shanghai-based partner of Baker & McKenzie specialising in cross-border transactions, said would-be acquirers should note that making an acquisition was the easy part as they would be assisted by advisers. The subsequent integration was often challenging for Chinese firms not used to foreign laws, culture and politics.

"Once the deal is closed, the buyer will be left with management and will need to learn how to swim quickly," Gu said. "Acquirers need to pay attention to due diligence early on."

Martins said Brazil's labour laws were more protective of employees than those of China. In Brazil, every dollar of salary came with another dollar of fringe benefits, and labour unions were powerful.

The tax system was also complicated, with more than 40 types of taxes levied by various levels of government, and environmental protection could also be tricky.

Another key aspect of the due diligence process is political risk, since Venezuela, Argentina and Bolivia have nationalised businesses in recent years.

Martins said Peru was considered the most open to foreign investment in South America, while Argentina was among the most restrictive when it came to government approvals.

Gu said many mainland businesspeople had the wrong impression that South America was similar to many parts of Africa, where having connections with top government leaders often helped get deals done without having to go through formal approval procedures.

"South America is closer to the US and Europe rather than to Africa, in that you still need to go through the procedures even if you do have connections at the top," he said.