In Commodity News 02/06/2015
Chinese investors are circling distressed Australian iron ore miners, according to local dealmakers fielding growing interest in the commodity’s struggling mid-tier ranks.
The sustained lull in iron ore prices has put iron ore miners under considerable pressure, causing market values to plummet and a handful of Australian producers to suspend operations.
Certainly, we are fielding an increased level of inquiry or interest in a number of mid-tier players.
Adam Handley, Minter Ellison West Australian managing partner
The price of iron ore has slumped close to 50 per cent in the past 12 months to hover at around $US63 a tonne, after slumping as low as $US47 a tonne in April.
Against this backdrop, an increasing number of Chinese entities had expressed interest in providing debt or equity to iron ore miners, acquiring an asset or attempting a takeover, Minter Ellison West Australian managing partner Adam Handley said.
Mr Handley said Chinese groups had shown capacity to acquire major interests in distressed assets in the past, particularly after the Global Financial Crisis, and were again beginning to show interest in striking deals in iron ore.
“It is a trend that is developing as we have seen it emerge over the last two or three months and I think its gathering some pace,” Mr Handley said. “Certainly, we are fielding an increased level of inquiry or interest in a number of mid-tier players. I think there is an opportunistic element to the current activity we are seeing with prices so low and companies which have taken a significant hit to their market caps.”
Sophisticated investors
Mr Handley, who has worked extensively with Chinese groups in the past, said the quality and sophistication of Chinese investors had “improved dramatically” in the past decade, with more Chinese parties now familiar with Australian processes, particularly hostile takeovers.
“In the last couple of months we have seen an increasing level of appetite and understanding on how takeovers might be done on a hostile basis rather than on a friendly basis,” he said.
“This is a shift; if you look at the track record of China undertaking takeovers in Australia there have only been a couple that were truly hostile but I think that appetite is changing and China is becoming more comfortable with our capital market system.”
Andrew Forrest’s Fortescue Metals Group is thought to have held talks with China’s biggest conglomerate, CITIC, and its biggest steelmaker, Baosteel, about a potential capital restructure.
Rumour mills
Rumours the miner is on the hunt for a Chinese investor, which have persisted since Mr Forrest visited Beijing and Shanghai in March, have been talked down by the company.
Managing director of boutique advisory firm Record Point, Paul Harris, said Chinese groups were looking at Australian iron ore players to ensure future supply and find value at the bottom of the cycle.
“I do definitely see them interested in sniffing around and picking up distressed assets,” Mr Harris said. “After CITIC’s spend on Sino Iron I think they are especially keen to pick them up on the cheap.”
However, one banking source who declined to be named said he believed China’s focus was now firmly on quality.
“China is buying now more quality assets and secondly there is an increasing sophistication in the way they play these offers… they are the two trends I am seeing,” he said.
There was enough supply in the market for China to allow some of the lower quality producers to shut up shop, he said, with the focus on securing supply and preventing market concentration more likely to centre on bigger players such as Fortescue.
Citi analysts last week said iron ore prices were expected to remain depressed until 2025, forcing consolidation in the Australian sector with mines owned by BC Iron, Grange Resources, Arrium, Cliffs Natural Resources, Gindalbie, Mount Gibson Iron, Mineral Resources and CITIC at potential risk of closure.
Both Mr Handley and Mr Harris also noted strong demand for gold assets and likely further consolidation in the sector after a run of merger and acquisition activity. Mr Handley said there was interest in gold and copper assets, “ranging from the mid-market assets to the larger assets”.
